Pub. 9 2020 Issue 4

24 In the wake of the COVID-19 pandemic, financial institutions can quickly realize savings by renegotiating major vendor contracts. Earnings rank high on the list of challenges banking executives are facing as they adapt to the “new normal” of COVID-19. While most Americans have been functioning under nearly two months of stay- at-home orders, banks have been operating under business continuity plans, limiting branch traffic to drive-thru and by appointment only, managing increased customer needs and, for those participating, dealing with the demands of the Paycheck Protection Program (PPP). As banking leaders look for ways to cut costs to minimize the impact of interest margin and noninterest income compression, vendor contracts should be in the crosshairs. Renegotiating major vendor contracts can quickly generate hard-dollar cost savings for financial institutions. From a financial perspective, interest margins and consumer spending are two areas where banks are going to feel the biggest impact of COVID-19: • Interest margins will compress. While homeowners are refinancing to take advantage of historically low rates, the demand for new mortgages, consumer loans and auto loans, coupled with the slowing in new commercial real estate loans, will put a drag on loan production. Financial institutions participating in PPP are working day and night, handling applications for loans that pay a fixed rate of 1%. • Consumer spend has reduced. The average bank generates 30% of its noninterest income from interchange. Meanwhile, card volumes have declined 15%-20%. Grocery and online spend have increased compared to other interchange categories, but these categories are traditionally on the lower end of interchange rates. Core vendors are also facing challenges: • New technology is taking a back seat. Interest in new technology always wanes during economic downturns as businesses pivot to operational efficiency. • Payments revenue has declined. The dramatic drop in consumer spending translates to a significant impact on revenue from payments processing. The Big 3 core vendors are just as much payments processors as they are core vendors. On average, they generate 40% of their revenues from payments. The word in the Cornerstone client trenches is that vendors are taking steps to proactively offset the pandemic’s impact on their bottom lines. We’ve been told that sales agents are dismissing requests for three-and five- year term options in favor of seven-, eight- or even 10-year terms. By all indications, sales agents are being told to get out there and extend term. In addition, we are hearing that vendor reps are engaging with customers well within the current term rather than the typical 12 to 18-month lead time on contract expiration dates. The goal is to renew early and extend term. At Cornerstone, we call this an “unsolicited bid.” It’s not just happening with the vendors’ larger clients. An institution with less than $100 million in assets and three years left on its contract recently shared how By Nick Lane, Director, Cornerstone Advisors How Vendor Contract Renewals Can Offset Earnings Challenges