An Update: Managing Your Core Vendor Contracts

In assisting clients with vendor negotiations, I continue to see contracts that are very “one-sided” in terms of protecting the vendor as opposed to the bank. This is to be expected. Banks have signed these contracts without much review for many years, often unwittingly agreeing to terms and conditions that increase costs, liability, and exposure for both normal end-of-contract termination, and early termination.  If you are within two years of contract expiration, it is time to start reviewing your current contract to understand your rights and obligations, and to plan for either a renewal scenario, a vendor evaluation and selection scenario, or both. Here are some key areas of your contract that you’ll want to look into: 

  • Automatic Renewal Clause – many contracts contain a provision whereby if notice is not given in advance (typically 180-365 days) the contract will automatically renew for some specified term. Even if you intend to renew with your current provider, notification under this clause will give you the flexibility to make a good decision on your time frame.
  • Early termination fees – especially since we are entering a period where we might begin to see more M&A activity, these fees should be identified and addressed, as they may be material to the purchase price of an institution. Typically, vendor contracts provide for substantial penalties, as much as 80% of the average monthly fees for the remaining term, etc. – you won’t be able to change how the contract reads today, but you’ll want to negotiate for better terms going forward with any vendor.
  • De-conversion fees. Should you choose, at the natural end of a contract, to move to another vendor, you’ll find that your current contract may be somewhat open ended (as in “blank check”) as to what your current vendor may charge you for deconversion assistance. Again, little can be done in your current contract, but you’ll want to negotiate for a reasonable, fixed fee in any new contract.

Be sure that you thoroughly review both your current contract, and any proposed contracts, for terms and conditions that may create liability and exposure for the bank. As I’m fond of saying, “there’s a reason those contracts are 70-80 pages long, and it is not for the benefit of the bank” Caveat Emptor.

A twenty-eight year industry veteran, Trent Fleming is widely recognized as an expert in many areas of banking technology, operations, and strategy. Trent will be speaking at the IBA Applied Technology at Operations Conference on October 25-26 in West Des Moines.

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