Pub. 9 2020 Issue 4

Pub. 9 2020 Issue 4 25 its vendor (one of the Big 3) gave the institution a renewal proposal to add four years to the term. These types of activities will allow vendors to report to the Street that, while new business growth is taking a hit, service contracts are up overall. Because markets are forward-looking, if vendors report contract extensions as positive forward guidance, it can have a positive impact on their share price. That’s it in a nutshell: increased share price for vendors and less flexibility with longer terms for their clients. That is, if their clients let it happen. Knowing the vendors’ needs and priorities gives banks additional leverage to negotiate favorable renewals. Here are five tips for making the most of the opportunity: 1. Don’t let contracts auto-renew Amid COVID-19, FIs are inundated with additional responsibilities. For example, renegotiating a card processing contract could easily drop down on an institution’s list of priorities, making auto-renewal the default course of action. Banks should recognize that even if the vendor hasn’t reached out to discuss a renewal, now can be an opportune time to think proactively about reducing noninterest expense through renegotiated contracts. That being said, from a strategic standpoint, an embedded one-year auto-renewal clause in a contract can provide an institution with the f lexibility it will need if it is considering a replacement of the service. 2. Consider starting early D epending on the system, the sweet spot to begin negotiations under normal circumstances is 18 to 24 months prior to expiration. But these are not normal times, so it may be appropriate to start sooner, whether or not the vendor has contacted the institution. This is particularly true for an organization that needs to boost its remote delivery capabilities. Cost savings on existing products can fund investments in new products. 3. Be wary of unsolicited bids A 10%-20% reduction in fees might sound good, but it’s not a deal for an institution that is already paying 40% above market. An unsolicited bid is a clear signal that the institution is paying too much and the vendor needs to book the extension as revenue. This is the time to get pricing down to market — and not what the vendor says is market. 4. Don’t agree to more term than is comfortable While a seven-year (or longer) term may make sense in certain scenarios, these are the exceptions. Given the pace of change in technology, the ever-evolving vendor marketplace, internal growth and annual price escalators, a five-year contract is typically the sweet spot where an institution can achieve significant savings while maintaining a degree of f lexibility. Rest assured — vendors want the business no matter what the term length is. 5. Get outside help Banking executives are busier than usual and are likely to stay so for the foreseeable future. Reputable third-party professionals can provide authoritative access to market knowledge and do all the heavy lifting. As banks look for ways to reduce the impact of COVID-19 on their net interest margins and noninterest income this year, smart institutions will take advantage of the opportunity to reduce expenses through the hard dollar savings in their vendor contracts. As banks look for ways to reduce the impact of COVID-19 on their net interest margins and noninterest income this year, smart institutions will take advantage of the opportunity to reduce expenses through the hard dollar savings in their vendor contracts.