Does your Bank increase fees for loyal customers when they bring you new business with other companies and depositors? Do Banks penalize their commercial customers when they merge with other companies, need more capital or financial services? The answer is obviously NO to both questions. Such treatment would be anathema to community banking customer service and relationship building. But unbeknownst to most bank leaders, your most critical vendor would answer YES if they were running your institution.
Nationally, shareholders of merging community banks can expect to pay between $380 million and $410 million in the next couple years for services they will never use or enjoy from Core IT suppliers - taking a major bite out of shareholder equity and precious cash upside in any deal. Talk to any investment banker or attorney familiar with the many material considerations in even the simplest of mergers and the discussion of Core IT contracts will come up as a potential major impediment to getting a deal done - and the vendors know it. Core IT suppliers are essentially a Silent Shareholder that shows up in the dead of night to collect hundreds of thousands of dollars on average (and into the millions on some deals) for termination, conversion, de-conversion and integration services necessary for the surviving institution to complete the merger. In fact, their terms are written such that if you don't pay many of these fees in advance they won't hold a date for your future conversion post merger.
These one-sided payment terms are found in nearly all agreements and put the Bank at a major disadvantage, especially when you might not be thrilled with the incumbent supplier' services or past performance. Banks are forced to cough up large sums and extend contracts "as-is" with unfavorable legal and economic terms just to make sure the merger goes through smoothly and on time. Instead of reaping the efficiency of a merger by eliminating duplicate IT costs - making an acquisition more accretive - these agreements are written to punish the franchise and shareholders for their success and hard work that made the merger possible in the first place. Meanwhile, Core IT suppliers pocket the efficiencies of your merger.
Don't Wait Until After the Dance Begins
While mergers are on everyone's mind lately, many banks are caught flat-footed when these agreements are not proactively restructured years in advance of any merger. If you call your vendor after the LOI has been signed to ask for a shareholder-friendly conversion and termination quote - they already have you in their vice grips! Smart banks pre-negotiate termination, conversion and de-conversion expenses that are then pre-stipulated based on the processor of the bank they are buying. Famous business author Stephen Covey said that one should, "Begin with the end in mind" and these contracts are certainly something that must be visited [now] if your goal is to never meet the Silent Shareholder.
Punished for Buying A Bank and Bringing More Business
If your favorite business customer purchased another business - doubling in size - and then asked your bank to extend a larger line of credit or increase the number loans to help them expand - would you punish them, double their interest rate or charge them outrageous refinance or admin fees? Probably not, but Silent Shareholders are allowed to do this at nearly every merger opportunity.
If your customer "Fred" came in one day and said he talked all of his 200 co-workers into leaving Bank of America and Wells Fargo to move all their accounts to your Bank - would you thank Fred by handing him a bill for the employee cost necessary to open all of those new accounts? Sounds ludicrous, but this is exactly how your Silent Shareholder will punish your Bank for bringing them net new business they never paid $1 to acquire.
Buying A Bank with a Different Processor
Let's say for example you are a Fiserv-processed bank and you buy an FIS-processed bank of similar size and account volumes, doubling in size. Your shareholders put up all the money and equity to bring in the deal while your partner Fiserv will penalize you financially with conversion and integration fees to thank you for the net new revenue to their top line and simultaneously killing one of their competitors (FIS), Mind you this was completed without their sales team having to buy so much as a lunch for anybody. Said in a different way, Fiserv incurred $0 acquisition costs to capture that FIS-processed bank and then your shareholders shower them with more money for the privilege. Fiserv should reward your Bank for doing the deal in the first place, not penalize your shareholders. That's called "partnership" - right?
Buying a Bank with the Same Processor
When it comes to labor costs, not all service providers follow the same model. Some types of labor require scaling up to service more customers. For example, if a restaurant doubles its number of customers, then it will likely need more wait staff. However, when it comes to IT service providers – especially those offering a hosted or cloud solution – technological efficiencies mean that service providers can take on additional customers with little to no effort. For example, a Core IT supplier can simply “turn on” leveraged virtual servers in its data center without increasing labor. In fact, in most cases the cost of service per customer goes down when labor remains flat and the customer count increases.
As a Bank, how does this impact you? Core suppliers can charge a “termination fee” along with other conversion and de-conversion fees when two existing customers merge. Sometimes they will force you to combine the term and Total Contract Value of both agreements into one so they remain. But there is no rational basis for these fees or demands. In fact, if two existing customers merge, then it actually decreases the core banking provider’s costs! This is especially true for a hosted service model, which is essentially “plug and play.” For example, if Jack Henry is servicing 500 customers in a particular data center and two of these customers merge, then Jack Henry will only have 499 customers remaining to serve in that data center.
In this instance, labor costs should either stay the same or go down, but the provider’s costs would never go up! So why do core banking providers impose these additional fees on you and your shareholders? Because they know mergers and acquisitions activity is common among community banks, and these types of fees are a cheap and effortless way to grow revenue with little associated cost. They know that shareholders would rather swallow the costs than not complete the merger.
The Golden Contract Coalition Answer
With respect to mergers, these agreements are written to benefit only one party - the Core IT supplier (aka 'Silent Shareholder'). Suppliers should reward a bank when their shareholders buy a bank processed by a competitor - not punish them. Eliminate conversion and integration fees and start splitting revenue with your "partner" on interchange revenue, etc. since they didn't spend a dime to woo that Bank in the first place. Suppliers should outright eliminate these expenses and make the investment in keeping their acquisitive customer happy, growing and surviving. - that's partnership! When a Bank buys another institution processed by the same supplier; vendors should be thanking their stars they survived and passing on operating efficiency to the surviving customer not bilking them with complex algebraic math problems buried deep in the bowels of their contract that ensures the supplier is "whole".
Members of the Golden Contract Coalition want a new agreement that addresses mergers in a fair way. Members will only do business with those suppliers that adopt the Golden Contract Standard of providing IT services to this marketplace with a fair, balanced and marketing-conforming contract - The Golden Contract.