With 2018 well underway, industry experts say credit union executives should adopt the following New Year’s resolution: Be more proactive when vendor contracts are set to expire and/or renew, and learn how to negotiate better terms.
“Financial institution executives and managers too often have to sacrifice other equally important responsibilities to have the time to consider the growing complexity in these contracts and have comparative data that is very limited in most instances,” said Brad Downs, CEO of the Memphis-based Strategic Resource Management.
Among SRM’s 700 financial services clients is the $276 million Columbus, Ohio-based CME Federal Credit Union. CEO and President Jeff Carpenter explained that in 2016 the CU needed to find a way to “replenish our depleted capital,” which was a result of losses realized from a “First-Time Auto Buyer” program.
“We successfully negotiated both our credit/debit processing and branding contracts very early on in the contract lifecycle,” noted Carpenter.
By negotiating the contract, CME Federal increased cardholder benefits for members, increased interchange revenue to the credit union, reduced processing expenses and was able to make allowances for both operational and marketing costs to off-set conversion costs.
“The growing complexity of vendor relationships and the drive to continually improve bottom line results will create pressure for credit unions to become more diligent in monitoring the various time sensitive aspects of their supplier contracts in 2018,” said Downs. “Keeping track of the basic triggers within the contracts for auto-renewal, expiry date [and] notification of intent to terminate will insure maximum leverage, and allow financial institutions to lock in today’s pricing and terms ahead of inflation and other forces that may emerge in the future.”
New vendors on the block
With the rise and proliferation of fintech companies, coupled with “old guard” vendors, credit unions are being bombarded with tech pitches daily that purport competitive services at better pricing.
“I estimate that I receive over 100 vendor requests each week,” said Carpenter. “If I took the time to respond to each of them, I would have no time to achieve our mission of serving and enhancing members’ financial lives.”
While vendor competition is viewed as a positive, Sabeh Samaha, CEO of the Miami Beach, Fla.-based technology consulting firm Samaha & Associates, said understanding the nuances of the credit union space takes time. As such, CU leaders should proceed with caution.
“Credit unions must realize that fintech is not a new concept, but rather new terminology. Financial services firms have always been creating and offering technology services to credit unions,” said Samaha. “So credit unions have to better understand what it is these vendors…are offering today.”
Samaha is encouraged that “venture capital” or “fintech” is investing in banking software and technology. His statement, however, comes with a caveat: “This is in its infancy and an acclimation period of discovery on both side of the equation is required.”
In some cases, SRM’s Downs said, credit unions with solid, long-term vendor relationships are being offered “significant discounts” for extended-term contracts.
“In 2018, for example, cards will continue to represent one area where longer terms are yielding benefits to financial institutions as card companies battle for brand footprint,” he said.
Industry experts recommend that credit unions begin looking at vendor contract terms one to two years prior to contract expiration or renewal. Carpenter said that when a contract is flagged for notice of termination, senior management now confers with SRM to determine if the “financial and/or operational impact” warrants engagement.
“If it is something that is best handled in-house, the respective senior manager will evaluate and make a recommendation to the CEO,” said Carpenter. “In some cases, we will have dialogue at our biweekly management meetings to discuss cross-organizational impacts.”
Downs is calling 2018, among other things, “The Digital Revolution.” To this end, he said innovation in digital banking will “drive an increase in vendors” in the CU space.
“Credit unions will find themselves working with smaller companies that have expertise in this area and struggling to determine how to best evaluate their options,” said Downs. “Negotiating for the win-win arrangement will be made more difficult given the entrance of these new companies, technologies and pricing options.”
In Samaha’s view, the addition of new fintech companies is a “good thing,” but in order for each camp to realize success, a learning curve must be overcome.
“The fintechs have to better understand the credit union space,” Samaha continued. “In turn, the credit unions have to understand what the fintechs are offering that is newer - whether its payments or cards or core. This is fintech 2.0.”
When it comes to vendor contract negotiation, Downs said credit unions have leverage to negotiate contracts that work “well in their favor, and to the benefit of stakeholders,” while maintaining a “positive relationship” with third-party providers.
“The most important advice we can pass along to any financial institution is to review contracts often and begin the negotiations well ahead of the auto-renewal or intention to terminate,” said Downs. “These best practices transcend any market cycle or new technology that may emerge.”