Wednesday, August 31, 2011

Summer 2011 Banking Newsletter

Trent's Comments
Summer 2011
Germantown, Tennessee
This time, a few thoughts on some current matters that you should be considering as you begin your budgeting and strategic planning processes for 2012 and beyond.

An Update: Managing Your Core Vendor Contracts

I am currently involved in a number of core vendor renewal or selection engagements. 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. In addition, the trend toward Master Agreements (MA) can mean that when additional products or services are acquired, the term of the MA is extended to run co-terminus with the original contract. If you are within two years of contract expiration, it is time to start reviewing the 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.

These issues, and several others, are as important to you as the actual pricing on the 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

Debit Card Opportunities

There has certainly been a lot of discussion recently about debit cards, in light of the changes in interchange fees. Many community banks will not be affected, at least initially, by these changes, but there are still challenges and opportunities in the current environment. For many banks, signature debit card interchange fees have been an important source of fee income. Retailers are conspiring against you, though, in two ways: fighting for reduced interchange fees, and implementing procedures at POS terminals that make it much easier for customers to enter a PIN rather than use their card as a signature debit. They have won a round of lowering fees, and will likely continue to discourage signature debit use. In order to preserve at least a portion of your current debit card fee income, and perhaps increase utilization, it is important that you promote the use of cards across your customer base. Your promotion can include the fact that your card is free, and that there are no ongoing fees for using it. You'll also want to encourage customers to use their cards for on-line shopping, and web based bill pay, as these transactions will be treated as signature based and can generate fee income. Generally, when you promote debit card use, you see an uptick in usage, which becomes permanent. That is, it goes up, and stays up . . . so promotion is a good idea, and it seems that customers embrace the value of using the card when you encourage them to do so.

Finally, remember that processing a card transaction – whether PIN or signature – is ultimately much less expensive than a paper check, in terms of processing, storage, and retrieval. I've heard comments from community bankers (and seen announcements from larger banks) regarding charging for debit cards. This is madness, if you consider the cost differential of debit cards versus the prime alternative for your consumer accounts (paper checks). Also consider that companies like Paypal offer debit cards, that can be linked to your customer's accounts and used without fees. It's not wise to drive a consumer to another product.

Trent Fleming Consulting – Examples of Current Engagements
Please keep in mind that I can assist you with a variety of strategic, operational, and technical issues. Currently, I’m assisting banks in these ways:
  • Core system contract and vendor negotiations
  • GLBA Risk Assessment for Operations and Technology
  • Teller Capture Vendor Assessment and Implementation Planning
  • Branding and Advertising Initiatives, including Internet/Social Media Strategies and specific product and service promotion
  • Remote Deposit Capture Implementation and Marketing Services

Upcoming Speaking Engagements
August 2011
  • 16: Graduate School of Banking, University of Wisconsin-Madison “Reinventing Your Bank's Marketing Focus”
September 2011
  • 27: South Dakota Bankers Association Technology Conference, Sioux Falls
  • 28: Wisconsin Bankers Association Technology Conference, The Dells

October 2011
  • 7: Washington Bankers Association Technology Conference, Seattle
  • Graduate School of Banking, University of Wisconsin-Madison, First Annual Technology
Management School, October 16-20, 2011 (NOTE: this school was so popular that GSB has added a fall session)

That's it for this issue - please call, email (or tweet or FB) if I can help you with these or other matters.

Trent's Comments is published six times each year and provides insight into strategic topics facing financial institution executives.  Please feel free to share this with your staff and colleagues. 
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Trent Fleming