Buried deep in the fine print of your Core IT agreement is something called an “Exclusivity Clause”. Most bankers don’t know it exists. Most again don’t know what it means until they bring a competitive solution from a newer fintech to the relationship. Bankers are surprised to find out that a vendor armed with the Exclusivity Clause (EC) has near total control over your destiny – at least for the next 5, 7 or 10 years. Unless, of course. you are prepared to cough up 50%, 80% or even 100% of the remaining contract value to exit the service for greener pastures. This is completely unreasonable but it’s important to understand how we got here before we chart a course of freedom.
In late June, Forbes published an article on FIS’recent attempt to unilaterally implement a new security surcharge on a “select few” of their clients without their permission (FIS has not stated publicly how many were targeted but GCC estimates there were 250-300 guinea pigs). These fees, costing several tens of thousands of dollars per client, were imposed because FIS stated it hadrecently improved its security infrastructure to address new threats and that they wanted to “partner” with their clients in sharing this expense. No explanation was provided as to exactly what these threats were or why they decided to deploy this tariff [now] and without the consent of their clients, even though each FIS client had already agreed to a security SLA guarantee in their existing agreements.
The simmering of banker's discontent for the solutions and partnerships offered by the Big Three Oligopoly ("the BTO") of FIS, Fiserv and Jack Henry is now hitting a boiling point. The Wall Street Journal on Friday printed an article titled: Frustrated by the Tech Industry, Small Banks Start to Rebel. The Golden Contract Coalition and several of our member bank senior executives were consulted heavily on the research for this article. Considering that most WSJ readers would have no idea what a "core IT" suppliers is - let alone their relationship with their community banks - writers were eager to report the injustice happening on our little industry island. How could the free market and our government allow an entire industry to survive under the thumb of just thee powerful entities?...was fascinating to the WSJ and clearly warranted a front page, top-of-fold position.
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.