No one knows better than a bank that time is money. The longer a customer can commit their funds, the better the rate a bank will pay on their deposit. The same applies to technology contracts. The longer your bank is willing to commit to your vendor, the better the rate and/or discount your bank will receive.
However in some cases, a longer commitment in order to receive increased discounts will prove to be extremely costly for a number of reasons. I will explore some of these reasons in this blog.
Since the beginning of 2012 through June 30, 2017, 1,355 banks were acquired in the U.S. In most (possibly all) of these bank acquisitions, there were contract termination fees to be considered. Nearly every bank has outsourced services of some kind. Each of these services have provisions in their agreements describing liquidated damages if contract terms are not satisfied. I discussed this calculation in a recent blog, “The Cost of Saying Good-Bye” ( May 17, 2017 – link below). Service agreements will indicate that a certain percentage of remaining charges will be due upon termination. The percent due and the remaining term of the contract are the two most important variables in this calculation. Of those, terms of agreement are particularly important and more controllable by the client. The average term of core processing agreements grows longer each year.
For example 15 years ago when I was selling core processing, the vast majority of deals were for five years; there may have been a few unique circumstances where a three-year agreement was signed. At the time, seven-year contracts were becoming more acceptable. Today, nearly every vendor is loading their longer-term agreements with incentives that either reduce the monthly charge or increase the upfront credits available at signing. The new standard is six-to-eight year agreements. It is not uncommon to see 10-year contracts proposed and accepted by banks.
How certain are you that your bank will remain independent? That is a tough question to ask and to answer, but it deserves consideration. There is a vast difference in termination charges if your bank is three years into a five-year agreement compared to three years into a seven-year or 10-year agreement. Termination fees directly affect shareholder value. I am sure there have been banks acquired with more than five years remaining on their term, possibly much more than five years. These terms are a major hit to shareholder value.
Another consideration is that by extending the contract term, your bank delays the opportunity to renegotiate pricing upon renewal. If the discount for renewal is the elimination of the cumulative CPI price increases, that won’t occur until the end of the contract. The discount may be considerably more. Therefore, it is wise to ask, “Will the incentives offered justify delaying renegotiation to only once a decade?”
All too often issues are addressed and resolved when an agreement is up for renewal. It is quite disappointing for banks to realize they are being ignored by vendors until the last 18 months of their agreements regardless of terms. Frankly, I see this scenario several times each year with my clients.
Upon renewal you will see the incentives for long-term renewal and should consider if increased terms from five to seven years, or eight to ten years, is actually worth it. Dust off your crystal ball, you will need all the help that you can get. There is no easy way to determine the right answer. I advise you to consider all of the factors when renewing your vendor contracts.