When it comes to negotiating contracts with their tech providers, small banks are hoping to find strength in numbers.
That's the idea behind the Golden Contract Coalition, which aims to negotiate contracts on behalf of dozens of member financial institutions in hopes of creating more leverage than a small institution typically would have on its own. Smaller banks and credit unions do not generally get as favorable contract terms from their core vendors as a large institution might, said Aaron Silva, founder and chief executive of the Golden Contract Coalition.
"It's hard for smaller institutions to get a fair-market deal," he said. "And often they don't have the internal expertise to understand every little detail in these 2-inch-thick agreements."
Essentially, the coalition has created a template of a master, or "golden," contract for all of its members, with each individual agreement being further tweaked by the coalition based on the size and specific situation of each member. Currently, 40 banks and credit unions have agreed to sign on, and Silva is aiming to have between 200 and 300 members.
The group is seeking financial institutions of $15 billion or less in asset size, with two to 10 years remaining on their contracts with the core service providers. Negotiating on behalf of members of the coalition are Paladin fs, a consulting firm headed by Silva that helps banks in choosing core vendors, and Pillsbury, a law firm that specializes in IT contract negotiation.
Member banks pay a fee to be part of the coalition, which in turn provides them the negotiating services and expertise of Paladin and Pillsbury, as well as access to the "golden contract." (The coalition didn't disclose the fee.)
Silva said the "oligopoly" of the major core vendors — Fiserv, FIS and Jack Henry — makes it extremely difficult for any but the largest banks with the most leverage to get favorable agreements. He referenced a recent American Banker article that cited statistics from FIS FedFis showing those companies provide core banking systems for 93% of banks with more than $1 billion in assets. For banks with assets of less than $1 billion, the three serve 84% of the market. (FedFis is a research firm unrelated to the core provider FIS.)
Although Silva's company stands to benefit from the coalition, he says its aim is to give community banks the same bargaining power he has seen when core providers negotiate with larger organizations. For instance, Paladin was once retained by a $105 billion-asset bank in a negotiation with its core vendor. The negotiations went smoothly — the bank was able to reduce its costs by millions of dollars and the vendor was overwhelmingly accommodating. Smaller banks have a decidedly different experience.
One member, the $700 million-asset Town & Country Bank in Springfield, Ill., is hoping the collective will help community banks gain more flexibility in picking technology options, said Micah Bartlett, the bank's CEO.
Smaller banks usually don't have the resources to create technology in-house, and rely heavily on their vendors for consumer-facing technology products. And often, contracts with core vendors make it difficult for smaller banks to switch to a different mobile banking or online banking provider, Bartlett said. For example, a vendor might have a clause in a contract that states a bank can stop using its solution, but can't use a competitor solution for a certain amount of time. Either way, it makes changing vendors for some products onerous.
"Maybe we'll like the core capabilities of the [core banking] system, but we think the online banking piece is behind the times, for example," Bartlett said. "The way the contracts are, it makes it extremely expensive to switch to a new online banking vendor in that scenario."
Silva stressed the coalition's goal is not to have an "adversarial" relationship with vendors, but simply to allow smaller financial institutions to achieve more equitable agreements.
"We're not looking to hit the vendors over the head with this," he added. "Both vendors and the bank spend countless hours in tense negotiating, and that creates angst and erodes goodwill. This way will be better for both sides."
Silva said that he has already spoken with two of the three major core vendors about the coalition, and that they were "open-minded" about the idea.
FIS and Jack Henry did not respond to requests for comment. Fiserv said in a statement, "The marketplace for financial services technology is competitive, and our solutions are competitively priced."
"We respect that our clients have a choice and work diligently to deliver the value they expect every day," Fiserv added.
In banding together for buying power, the coalition is similar to how small hardware stores across the country formed co-ops like Ace and others to pool resources and combat the buying power of the big-box retailers like Home Depot, said Jeffery Smith, an attorney at Vorys, Sater, Seymour & Pease.
"It's really a way to get the benefits of a holding company while remaining independent," Smith said.
Still, Smith said he isn't expecting a major shift in power between the core systems vendors and community banks.
"Especially considering the small number of alternative core providers, it may be difficult to get the big vendors to bend much," he said. "Still, pooling resources can only benefit community banks. Anything that gives community banks the opportunity to reduce expenses is positive."