The Remedy Blog

When it comes to financial institution technology (everything from teller lines to client-facing mobile applications) used by your bank or credit union, you might be tied to a core vendor for five, seven, maybe even ten years. For technology that usually comprises the 3rd largest expense, negotiations are crucial and simultaneously, quite infrequent.

As the previous VP of Product, Pricing, and Contracts at one of the largest core vendors, I’ve noticed multiple mistakes made by banks and credit unions throughout the years. These mistakes, while easily avoidable, place banks in a poor negotiating standpoint with the vendor that oftentimes result in expensive long-term contract terms and conditions. Now, as a consultant partner to your bank or credit union, I’m here to share the most common mistakes.

1. Starting negotiation too late.

What is the most optimal time to start contract negotiation? This is by far the most common question we are asked as consultants. Assuming you’re going to stay with your current vendor, we’ve found that a good time to start contract negotiation is 24 to 30 months before the contract expiration date. If you’re looking to switch vendors, you may need another year on top of that.

When I worked for the vendor, I knew that if the bank was in a position where there wasn’t enough time to convert to another provider, I basically didn’t have to negotiate. I like to think about it as if I were sitting across the table from somebody playing poker: if I know what’s in their hand, I know whether I’m going to bet or fold. That’s how vendors look at these situations—if you come too late, you’re not in a good position to negotiate on behalf of your bank.

Usually, this happens when C-Suite members (or whoever is negotiating on behalf of the bank or credit union) get too busy and resort to pushing back their negotiation discussions. This heavily reduces the bank’s negotiating position, and the vendors know it and will use it to their advantage.

2. Ignoring contract terms and conditions.

This mistake is broken down into two parts: not making contracts coterminous or ignoring the contract and vendor during merger acquisitions.

The most prominent mistake is non-coterminous contracts, or when technology contracts end at different times. As an example, let’s say that your core and debit cards are both with your largest vendor, but debit ends in year two and core ends in year five. This becomes problematic for multiple reasons: you have to negotiate more than once, you are stuck with multiple and varying termination fees, and you can’t de-convert. Ultimately, you’ve lost your negotiating power and vendors will try to keep it this way.

The second mistake related to contract terms and conditions is failing to re-open discussions during merger acquisitions. During this time, there are a variety of fees that move between the vendors: termination, conversion, de-conversion, new products, etc. A simple but effective solution is returning to the vendor and discussing how to reduce fees while the merger occurs. Oftentimes, I noticed that C-Suite members would get too busy and, consequentially, overlook these hidden fees. If you’re in this situation, it might be time to call in a consultant that can optimize your contract and avoid those fees.

3. Assuming you’re a better negotiator.

I’m sure you’re a great negotiator, but what banks and credit unions might not realize is that it’s not about skill in this situation, it’s about pure information. When I worked for the vendor, there were so many times when customers would brag about their negotiating skills: oftentimes, these were the ones that resulted in the most expensive contracts.

Here’s why: it’s because the vendor, who will negotiate four- to five-hundred deals per year (as opposed to your one every seven years), has more data than you can imagine. This data allows them to create a pricing curve (a weighted average) of everybody’s expenses, whether you have the exact same set of services or not. The vendor’s goal is to make sure you pay higher than the curve for every single part of your service. With that information, they have a handful of tools they can offer you, of which they’ll offer you the ones that are least damaging to them, which generally will not reduce their rates.

You shouldn't assume you have more information than they do: it will ultimately place them in a position of higher negotiating power.

4. Overlooking sales initiatives.

It’s important to realize that client partners are commissioned salespeople. This means that end-of-quarter and -year are essential time periods for providers: from rolling up financial perspectives to individual commissions, this is where they make their money.

Similar to buying a car, if you have the ability to purchase it at the end of the year, you do it. In terms of your contract, generally, if you can close near the end of the year or quarter, you’ll see a lot more pressure to close. As the bank or credit union, time pressure is not something to worry about (unless you need to install a service immediately) meaning that you can overlook this pressure and instead focus on finding extra discounts.

5. Using the same consultant for multiple negotiations.

Every consultant focuses on different terms and conditions. If you’ve used a consultant in the past, they’ve already optimized those specific terms and conditions. In my experience, when banks or credit unions change their consultant, they’ll receive new perspective, more money, and better terms and conditions.

This is because every consultant has their own model and method. If you use the same consultant multiple times, you might get the exact same rates and similar dollars, whereas if you change consultants, you’ll likely see an incremental increase in areas the first consultant didn’t think about.

For a more detailed explanation of these common mistakes and why/how to avoid them, listen to my podcast: