A group designed to help community banks negotiate contracts with the “big three” core systems vendors is expanding its mission to assist smaller banks with fintech purchases, and adding new leadership to spearhead the initiative, too.
The consulting firm Paladin fs announced on Tuesday that Alex Lopatine, who founded the cloud-based core systems provider Nymbus, will be the managing director of its new "FinTech Advantage," a unit dedicated to helping banks buy financial technology “needed to remain competitive and successful in the fast-evolving industry,” according to a press release.
Paladin fs operates the Golden Contract Coalition, which was formed in 2016 to negotiate contracts on behalf of dozens of member financial institutions. The idea is to give small institutions more negotiating muscle than they typically would have on their own, said the coalition’s founder, Aaron Silva, who is also the CEO of Paladin fs.
As managing director of Fintech Advantage, Lopatine — who is no longer with Nymbus — will work directly with banks and credit unions to “analyze their fintech needs and work alongside them to select the right technology for their future,” Silva said.
According to Silva, 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.
Jack Henry declined to comment; FIS did not respond to a request for comment.
“Choosing a core platform provider is among the most important decisions the leadership team of a financial institution can make," Byron Vielehr, president of Depository Institution Services for Fiserv, said in an email. "Given the importance of this decision, some financial institutions choose to include additional parties in the process, and we respect this choice. The Golden Contract Coalition is not a third party we have encountered with any regularity."
Silva said the coalition will represent more than 100 financial institutions with a combined $100 billion in contract revenue by the summer.
The group is seeking financial institutions with assets of $15 billion or less, and two to 10 years remaining on their contracts with the core service providers.
Member banks pay a fee to be part of the coalition, which in turn provides them the negotiating services as well as legal expertise.
Since its launch, the Golden Contract Coalition has been in discussions with the major core vendors on behalf of banks and has made progress in some areas and “met some resistance in some areas as well,” Silva said. Aspects of the Golden Contract that have proved difficult for the vendors include “the rights of banks to terminate contracts if the vendor doesn’t offer a competitive service,” he added.
Still, Silva said that a few individual member banks of the coalition have been successful “in getting about 80%” of everything in the Golden Contract when renegotiating contracts.
Early termination and severance fees are typically very high and difficult to avoid in agreements with vendors. They are so onerous, in fact, that they can add to the complexity of bank M&A deals, which are expected to be on the rise, said Jeffery Smith, an attorney at Vorys, Sater, Seymour & Pease who specializes in financial institution regulatory and corporate matters.
“The termination fee in leaving a system often is a significant consideration in the pricing [of a deal] and the timing of when it gets done,” he said.
“Somebody’s losing a client,” when an M&A deal occurs between two banks using different core systems, he added, which is why “the contracts tend to be pretty strong when it comes to severance.”
In general, Smith said coalitions like the Golden Contract may become more commonplace among community banks as they seek to pool resources to achieve purchasing power and influence they may not have had on their own.
“I think it’s not so much a consternation towards the services [that the core systems provide] themselves, but rather they might like better terms and pricing,” he added.