Reviewing Core Contracts Can Save Banks Money

It’s important for bank executives to review all core contracts in order to gain a clearer picture of overall financials. In the long term, reviewing these contracts can save time, money and aggravation. In the banking industry, contracts include core processing, debit cards, digital channels, item processing and imaging.

Contract review is not just important for product and service additions, it’s also valuable in the long-term strategic planning process as well as preparing for any M&A activity. It can be very illuminating, whether you’re considering switching vendors, negotiating better terms or in the valuation process.

Some of the trends banking has been experiencing include a focus on PPP, staff, customers and banking communities. Banks are also seeing less churn, less switching from one core to another and less buying and selling of banks. Vendors are approaching bank clients who have signed contracts in the past few years to ask them to sign renewal extensions. These trends indicate it’s an ideal time to review contract terms for planning for the coming years and to make any modifications.

Be sure to watch session recordings of Eide Bailly’s 40th Annual Bank Seminar. Hot topics covered in 2020 included banks approaching the $500 million threshold and $1 billion threshold, core contracts, CECL and M&A as well as updates on tax, political, economic and regional issues.

Due Diligence in Core Contract Review

Start the review process early, optimally at least 24 months out, by locating all core contracts. Be sure to make a note of original contract dates, attached addendums, autorenewal dates and nonrenewal terms as well as any other small print. Pay attention to contract provisions and commitments, early termination language, liquidated damages, deconversion caps, incentive credits and contract expiration terms. It can be very beneficial for banks to enlist the help of consultants to analyze contracts and protect their clients.

Contract Review for Bank M&A

Selling

To prepare for a bank sale, optimal savings will be achieved when the seller plans ahead and hires consultants for the contract review process, as well as to help negotiate all terms and conditions. All products and services contracts ideally should be coterminous.

In the valuation process, be sure all contracts are reviewed, and look for any red flags. Some red flags to watch out for include contracts that don’t match up with their major products and any early termination clause that doesn’t credit time with the vendor. Keep in mind that nothing is guaranteed unless it’s in writing in the contracts. 

Areas to analyze in core contracts when selling include:

• Termination dates
• Key components alignment
• Contract provisions
• Liquidated damages
• Deconversion fees
• Incentive credits
• Caps

It can be alarming how quickly vendor fees can add up when contracts aren’t matched up and when calculating how much is owed to the vendors. Total fees owed to vendors may be much higher than expected. Consultants may be able to help you work with the vendors to reduce the fees or negotiate new terms.

Buying

Buyers need to know what they’re buying when acquiring a bank. As part of the due diligence process in preparation for the addition of new assets, accounts and products, buyers will also need to anticipate fees for conversion and training. It may be possible to negotiate with the seller or the vendor in the process. It’s important to understand all the contracts to see the actual financial ramifications. 

Maximize Value with Core Processing Analysis Services

Core processing analysis services are a way to help alleviate the burden of researching, selecting and negotiating your core banking solutions. With the assistance of experienced professionals, you can be confident you are maximizing the value of vendor contracts and choosing solutions that meet the needs and goals of your bank or credit union.

What Does Core Processing Analysis Do?

Core processing analysis generally has three phases that can see your bank or credit union through the entirety of a deal or any portion of it. Core processing analysis is really about collaborating with your organization and delivering a tailored approach for your specific organization to achieve the best results.

The phases of core processing evaluation, core processing selection and technology contract negotiation are as follows.

Phase One: Core Processing Evaluation

The first phase involves the review and evaluation of existing contracts. This typically also involves determining your current strategy and future strategy regarding things like new markets, products and services. Contracts to examine could include:

• Core platform (core, teller, accounting opening, general ledger, etc.)
• Item processing and imaging
• Loan origination
• Debit processing
• Online banking (retail, business, mobile, etc.)

There should also be an evaluation of your vendors. This could include:

• Detailing all vendor relationships and systems in place
• Evaluation of any long-standing relationships with current vendors
• Interviewing departments on usage and performance of current systems
• A cost analysis
• Analyzing digital channels, debit and credit cards
• Assisting management with renegotiation-only strategies and strategy sessions with potential vendors if needed

Phase Two: Core Processing Selection

The second phase involves the actual core platform selection. This may involve assisting management with:

• Creating a list of requirements for the selection process
• Evaluating proposals based on that list and against current costs
• Obtaining references, setting up corporate visits and making the final selection

Phase Three: Technology Contract Negotiations

The third phase is participation with management in the transaction negotiations. Core process analysis professionals can serve in an advisory role to look at:

• All current products and services
• Service level agreement language
• Liquidated damages language for protection of future growth
• Early termination language
• Deconversion language
• Future value adds product and services

Trust and Experience

When it comes to core contracts, the review process can be complex. It’s not necessarily recommended to move away from a “best of breed” model to a single source provider model to achieve maximum results. A bank may have one service provider providing every service, with all the contracts having differing expirations, renewal terms and cancellation notification terms.

Vendors are trained to create contractual chaos to minimize margin compression. Experienced advisors help protect their clients and provide as many options to consider as possible. What’s ultimately important is that clients and staff are happy with the products and services in the core contracts.