Selling a bank is hard to do and it appears even planning to sell your bank may be made even harder when your core IT supplier manufactures an exit barrier worth hundreds of thousands or even millions of dollars. Millington Bank ($565M assets), a New Jersey savings bank located in the Township of Long Hill, filed a law suit against Fidelity Information Services (FIS) in the Superior Court of New Jersey.
Millington alleges they were coerced to sign a seven-year amendment and extension to their core processing agreement in September 2015 on a "take-it-or-leave-it" basis. Vendors are smart and are trained to wait until their client has less then than 12 months of contract term remaining before they formally approach for renewal talks - thus creating a negotiations advantage because there is little time left to switch if the bank is unhappy.
Similar to the Millington situation, the bank had little time [then] to make a processing change - a process that can take 12 to 18 months - and so they signed FIS' standard form agreement. The complaint states that FIS insisted that "...every bank with whom FIS does business are required to sign this [standard] agreement..." and there was no negotiating option for Millington. Accepting this statement, the bank may have found solace (other bankers signing the same) and then signed anyway.
Fast forward a few years and the bank wishes now to potentially sell, and upon re-examining the addendum, the liquidated damages clause unfairly benefits FIS with termination fees for services that FIS will never actually deliver. The complaint continues that one of the techniques deployed by FIS to coerce a customer bank into paying liquidated damages despite a dispute as to their legitimacy "...is a tacit or explicit threat to withhold the decommissioning, conversion and integration of data required by the merger or acquisition unless the customer bank commits to making the liquidated damages payments and then makes the payments upon the consummation of the merger."
Millington finishes the complaint with a demand for the court to rule the termination fees inapplicable, illegal, unenforceable and void.
Suppliers Unfairly Set the Rules, Not the Buyer
The Golden Contract Coalition ("GCC") mission is to forever change the way these core & IT suppliers contractually conduct business. One bank alone - such as Millington - has little power and few alternatives but to fight it out in court one-on-one vs. the multi-billion behemoths of FIS, Fiserv or Jack Henry. Only many banks together in a coalition such as GCC is there a chance to manufacture the necessary leverage to change the game.
With respect to the Millington complaint: Why should FIS have any security interest (liquidated damages) in the second term of a 12-year relationship? Certainly it is reasonable for any supplier that begins a NEW relationship with a bank to be harmed if a customer terminates the contract for a merger in the FIRST CONTRACT TERM because the supplier would have start-up costs, operational investments, etc. into that relationship and might not have reached ROI yet. But is this appropriate in the second, third or fourth long-term renewal? No way. Is it legal for FIS to refuse to provide access to the bank's own database and therefore interrupt the planned merger of two institutions if they are not paid fully in advance - even if there is a dispute between the two companies? Probably Not. FIS must show that they are being harmed by the merger and cessation of services and then they should further prove that the liquidated damages they seek are financially reasonable.
Outside of the community banking industry in other outsourced IT environments it is generally understood that liquidated damages should be no greater than the "Discounted value of remaining Net Profit"
Jack Henry typically forces a 100% termination fee, Fiserv and FIS at 80%. In what alternative universe is an IT service provider promised 50% to 100% of their entire contract value if their customer decides to terminate? What if the service they are providing is non-competitive and the bank is forced to buy another more competitive alternative from a different fintech supplier - should that institution still be forced to pay 50%, 80% or 100% of the value of their services? Their oligopoly is powerful and in the lack of any outside competition the big three core IT suppliers are getting away with just about anything they want.
Banks contemplating a merger (buy or sell) need to review their agreements NOW and implement provisions that eliminate the Silent Shareholder (blog post we wrote in 2017). Too many banks have unwittingly signed these agreements again and again and over several decades, making these terms institutionalized and nearly impossible to change one bank at a time.
We will keep you posted on developments, but typically core IT suppliers wisely settle lawsuits out of court and secure gag orders and non-disclosures on the results. The public and the rest of the industry remain stuck in the dark about the details.