Buried deep in the fine print of your Core IT agreement is something called an “Exclusivity Clause”.  Most bankers don’t know it exists.  Most again don’t know what it means until they bring a competitive solution from a newer fintech to the relationship.  Bankers are surprised to find out that a vendor armed with the Exclusivity Clause (EC) has near total control over your destiny – at least for the next 5, 7 or 10 years.  Unless, of course. you are prepared to cough up 50%, 80% or even 100% of the remaining contract value to exit the service for greener pastures. This is completely unreasonable but it’s important to understand how we got here before we chart a course of freedom.

Where did the EC come from?

This clause is a quintessential invention of the centralized processing environments of the 1970s and 1980s.  You remember the “heavy” or “big iron days” when IBM main frames dominated the world and companies ran their accounting software in big data centers staffed by minions of computer operators?  These operations were typically equipped and staffed by a single supplier with the responsibility of providing the computing power for their customers. EDS was a big pioneer in this business model.  It was the early days of “outsourced” services and IBM or EDS didn’t want to make a huge investment in dedicated equipment, personnel and facilities if their customer could change their mind at any time and leave them holding the bag.  Suppliers wanted and exclusive relationship – at least long enough for them to recover their capital investments and earn some reasonable profit.  The early ancestors of Fiserv, FIS and Jack Henry platforms come from this bygone processing world and their contract simply state: “You can stop using any of our services but you can’t use anyone else’s – unless you pay to leave.”

Your EC and the Core Contract is a Vestigial Organ of Days Gone Past

Prior to us launching the Golden Contract Coalition in 2016 we got an outside opinion on how current, by today’s standards, the ASP agreements used by the Big Three Oligopoly are as compared to their contemporary processing cousins outside of our industry.  To help we retained the largest and most successful IT contracting firm in the world, Pillsbury Winthrop Shaw & Pittman (aka “Pillsbury”). They reviewed two dozen typical Core and IT agreements specific to account / item processing, internet banking, bill payment and ATM/EFT services.  I’ll never forget the conversation we had on the day they returned the results to my team:

Pillsbury: “We have completed our GAP assessment of the core contracts issued by Fiserv, FIS and Jack Henry as compared to similar outsourcing deals found outside of the community banking industry between major companies and non-financial entities.”

Silva: “I’m excited to hear the results…what can you tell me?”

Pillsbury: “Again, how many banks sign these agreements in the U.S. today?  We mean, what percentage of banks have these types of contracts?”

Silva: “All of them, 100%.  Maybe 5,000 banks and 5,000 credit unions is my guess.”

Pillsbury: “Uh.  Really?”

Silva: “Yes, really.  I’m not joking – so what’s the problem exactly”

Pillsbury: “Well, our firm has been around a long time and some of our senior partners have been around even longer and as far as we can tell, these agreements have not existed in the IT outsourcing world since the 1980s.  We don’t see these contract structures, legal terms or general business practices anywhere else in the real world today. They’re extinct”

Silva: “No sh&t?!”

It was the shot heard around the office.  The confirmation of bad news we had always surmised, always been suspicious of was now validated by some of the best and brightest lawyers out there.  These contracts – and their embedded Exclusivity Clauses – were a heap of crap and every bank in the country had a bag full of it.

It’s 2020 Folks – I can have what I want, when I want it!

Today no software has an exclusive relationship between the buyer and supplier.  With a tap of my finger I can delete any app on my iPhone. With a few clicks I can unplug any application or extension found in my Chrome browser.  If I want to drag and drop the Microsoft Word icon into the trash – so be it – Bill doesn’t hunt me down for money. If I wasn’t married I could swipe left and swipe right to my heart’s content for dates.  If I don’t like E-Harmony I can switch to Tinder.  If I don’t like my iPhone I can pop my T-Mobile chip into an Android.  

So why then do these core IT dinosaurs hold onto the Exclusivity bone?  Greed and ignorance I think. Greed because it’s just damn greedy! For a vendor to dictate to the client “partner” (you) that they’re the only relationship in town no matter how they perform and even if you end up hating their software and services – is very greedy.  Ignorance because bankers for years have allowed it and not known any better. This compliant behavior has permitted the EC term to be institutionalized into Core agreements for decades, always unchallenged. You’re not alone because I didn’t know any better either until I got confirmation from Pillsbury just a few years ago.  Ignorance can be bliss.

So what can a banker do about it?

Not much, yet – but that is changing fast.  It took decades for the EC to become a standard way of doing business and the legacy cores depend on the power it provides them in reporting revenue into the public markets.  Many institutions are beginning to challenge the EC because the industry is realizing that apart from carnal greed – the EC is limiting bankers options to adopt more competitive alternatives.  Fintech companies entering the market are starting to create a lot of pressure on the EC by avoiding long term contracts and encouraging a bank to leave their service if they are not working hard enough or innovating fast enough to earn the right to keep your business.  This is how all of the software we use on our computers and mobile phones work today. If they are not innovating and bringing us new features and functionality – deletion is easy because 10 other replacement apps that do the same thing are a minute’s download away.  

Therein lies the rub where the Big Three Oligopoly can continue to depend on the EC – there isn’t enough fintech competition (yet).  Fintech is coming and coming in big waves but it will be some years before legacy cores need to rethink the EC. I’ve believed for many years that the EC is unnecessary at a fundamental level because the business disruption and friction involved with a bank converting to another core system is barrier enough to prevent the behavior in any rampant way in the first place.  Today only 2% of all banks volunteer to switch cores.  

If I were to build a new core for banks the only exclusivity clause you would find in my contract would be a Dedication Clause which spells out an undying commitment to making software that makes community banks better, stronger and more competitive.  Maybe one day these cores will see the light and do what’s right.

In late June, Forbes published an article on FIS’ recent attempt to unilaterally implement a new security surcharge on a “select few” of their clients without their permission (FIS has not stated publicly how many were targeted but GCC estimates there were 250-300 guinea pigs). These fees, costing several tens of thousands of dollars per client, were imposed because FIS stated it hadrecently improved its security infrastructure to address new threats and that they wanted to “partner” with their clients in sharing this expense. No explanation was provided as to exactly what these threats were or why they decided to deploy this tariff [now] and without the consent of their clients, even though each FIS client had already agreed to a security SLA guarantee in their existing agreements.

According to FIS, this security surcharge was justified, and in exchange they would extend indemnification to include the Banks’ clients behavior subject to exclusions already stated within their agreement. FIS stated that these kinds of security measures are becoming increasingly necessary, as cyber-attacks are growing in popularity and evolving in complexity.

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What This Means for FIS Customers

So, what makes these arbitrary security surcharges unacceptable? If FIS is providing a new or upgraded service level to their customers, wouldn’t it make sense to charge them for that service if they agreed to it first?

Small banks simply don’t have the power or weight to stand up against these providers, and so end up stuck accepting their predatory practices.

Download Forbes Article PDF

How The Golden Contract Coalition Fought Back

As soon as the GCC was made aware of FIS’ security surcharges, we immediately started taking steps to protect and prepare our members for the pending dispute vs. FIS on their behalf.

The first thing we did was make sure that all of our members were aware of the incoming fees, what they were for, what they meant for FIS customers, and how we felt about them. This not only kept all of our members in the loop but also gave small banks a voice as members of the GCC began reaching out to their own FIS representatives simultaneously.

Then, we researched into the subject as thoroughly as possible, collected data from dozens of FIS-processed members and carefully read through all affected FIS’ SLAs and contracts, communicated with our legal counsel, and figured out as much as we possibly could about the situation and bankers’ rights. With results in hand, we put the pressure on FIS.

How FIS ALMOST Got Away With These Security Surcharges

You would think that there would be some kind of protection against these kinds of practices for banks built right into their contracts with these core providers. 

In fact, nowhere in FIS’ contract is the Client protected from FIS levying these sorts of fees specifically in the middle of a contract term. When asked about this explicitly, a representative for FIS stated, “It [the contract] doesn’t say FIS can impose these terms unilaterally in the middle of a contract, but it also doesn’t say that FIS can’t, either.” How convenient.

This one loophole could have given FIS the ability to pocket tens of millions from their customers for a service those banks already believed they were getting. And this is just one of many loopholes in contracts issued by the Big Three Oligopoly, which they may continue to exploit in years to come.

This Isn’t The Only Way The Big Three Oligopoly Takes Advantage Of Small Banks

This is just one example of a way that the Big Three Oligopoly – or BTO – uses their anti-competitive bargaining position to rook their community banking and credit union customers

The BTO are not innovating in any significant way, and when they do, the features they offer are already years behind the rest of the fintech industry. They punish banks for growing assets, penalize them when they save the BTO money in a merger, and lock them into long term contracts that limit their access to better services by monetizing bank-owned data hosted on their systems.

Fortunately, the community banking industry is beginning to rebel against these unfair practices, and the methods used by the BTO are being exposed by outlets like Forbes and The Wall Street Journal.

Enter The Golden Contract Coalition

The Golden Contract Coalition, was created with the sole purpose of giving the community banking and credit union industry a fighting chance against the methods of these core providers. The GCC is a group made up of financial institutions from around the country who are working together to stop traditional contractual BTO practices, including:

• Eliminating Silent Shareholders – During M&A, the BTO does everything they can to capitalize on the growth of small banks through outrageous termination fees and backwards integration charges.
• Exclusivity Barriers – The BTO prevents their customers from switching to more advanced competitors by charging their customers 50%, 80%, or even 100% of their remaining contract value as a termination fee when an institution wants to leave their sub-par services for a more competitive digital solution.
• Service Level Objectives (SLOs) Disguised As Service Level Agreements (SLAs) – As seen in the case of FIS’s security surcharges, the SLAs that banks agree to with the BTO simply don’t work. Instead, these agreements are vague and littered with loopholes so that the BTO can capitalize on their customers at every opportunity.

The goal of the GCC is to make small banks aware of these practices, to bring heat onto these companies for implementing these practices, and to ultimately reshape the contractual relationship between banks and core providers by utilizing a Golden Contract standard. While we can’t change the core provider oligopoly, we can change how it’s used against small banks.

Learn More About The Golden Contract Coalition

FIS Retreats And Suspends The Security Surcharge

Thanks to the efforts of the GCC and its members, FIS processed institutions, and various bank associations, as well as attention brought to the situation from media outlets like Forbes, FIS announced on June 5th that they would be suspending the security surcharge program. 

In a comment made to Forbes, FIS showed just how tone-deaf they  are to the banking industry as a whole by defending the charges and the service they offer:

“FIS has invested hundreds of millions of dollars on people, processes and technology to provide our clients with one of the most advanced cybersecurity environments in the industry. The indemnity-focused security surcharge pilot program was a test program directed at a small number of our U.S. core banking clients, designed to provide them with an additional indemnification benefit and help offset the significant investments FIS continues to make to protect our clients in the face of rapidly evolving cyber threats.

Based on feedback from our valued clients, we have decided to end the pilot program, which had not been fully rolled out.”

They failed to recognize (or, more likely, admit) that the security service that they were surcharging for was something their customers expected as part of the service that they’re already paying for.

Apparently, if you’re a customer of FIS, you’re only going to get vital security features at a premium any longer.

The Fight Isn’t Over

While the pilot program FIS launched has been stopped, the surcharges themselves are only being suspended. It’s unlikely that FIS will completely about-face and offer the new security features as a part of the fees that their customers already pay.

Instead, it’s more likely that FIS was overconfident and is now backpedaling to avoid negative press and will come up with some way to reimpose these charges later on.

As a result, we urge any banks and bank associations to join in the Golden Contract Coalition’s mission changing the way the game is played with the Big Three Oligopoly. By working together to negotiate better contracts for banks and bring attention to these predatory industry practices, core providers will hopefully begin to work in favor of small banks – something they should be doing to begin with.

The simmering of banker’s discontent for the solutions and partnerships offered by the Big Three Oligopoly (“the BTO”) of FIS, Fiserv and Jack Henry is now hitting a boiling point.  The Wall Street Journal on Friday printed an article titled: Frustrated by the Tech Industry, Small Banks Start to Rebel.  The Golden Contract Coalition and several of our member bank senior executives were consulted heavily on the research for this article.  Considering that most WSJ readers would have no idea what a “core IT” suppliers is – let alone their relationship with their community banks – writers were eager to report the injustice happening on our little industry island.  How could the free market and our government allow an entire industry to survive under the thumb of just thee powerful entities?…was fascinating to the WSJ and clearly warranted a front page, top-of-fold position.

DOWNLOAD WSJ ARTICLE PDF

The international recognition of the problems faced by the community banking and credit union industry at the hands of these companies is warranted and a long time coming.  I would like to believe the public shaming of their business tactics and one-sided contracts started with the launch of the Golden Contract Coalition in 2016.  Validated by scores of banks joining the GCC (average assets of $1.7B each) it is obvious now to the BTO that banks are tired of long, exhausting negotiations against their “partners” and are now increasingly frustrated to learn that while the BTO revenues, profits and shareholder dividends continue to soar, the digital solutions they offer remain uncompetitive and mediocre at best.  Chase, JP Morgan, BofA, Ally, CapitalOne and Wells Fargo and every shadow bank are digitally flogging the legacy fintech solutions provided by FIS, Fiserv and Jack Henry to our wanting market.

Pressure Mounting

A flurry of moves by market entities have followed the Golden Contract Coalition lead and are upping the pressure on legacy service providers to do better.  In late 2018, American Bankers Association severed all formal endorsement ties to the Big Three Oligopoly witnessed by quietly ending their only remaining legacy core IT relationship with Fiserv.  Almost immediately thereafter, ABA launched their Core Platform Committee and CEO Rob Nichols fired off letters to the BTO leaders Yabuki, Norcross and Foss inviting them to join 21 other banks in a conversation about community bank demands on innovation.  All three CEOs responded in the affirmative (of course) and are, “eager to join” any conversation [that won’t affect their market dominance].  ABA followed these moves with a very public announcement of a strategic investment in FinXact a cloud-based core solution that will join competitors Nymbus, Mbanq and others vying for an opportunity to peel of any portion of the 90%+ pie held by the BTO.

It’s All Good

All of this public attention is good for our collective causeof ending one-sided, onerous, unfair and over-priced deals.  We take pride in knowing that GCC kicked the ball off the top of the mountain.  There is power in numbers and the fact that main street media like Forbes [Banks Take on Core Tech Providers with Coalition] and Wall Street Journal are upping the pressure and hopefully forcing the BTO to up their game is a good thing.

Join The Coalition

Selling a bank is hard to do and it appears even planning to sell your bank may be made even harder when your core IT supplier manufactures an exit barrier worth hundreds of thousands or even millions of dollars. Millington Bank ($565M assets), a New Jersey savings bank located in the Township of Long Hill, filed a law suit against Fidelity Information Services (FIS) in the Superior Court of New Jersey.

Millington alleges they were coerced to sign a seven-year amendment and extension to their core processing agreement in September 2015 on a “take-it-or-leave-it” basis. Vendors are smart and are trained to wait until their client has less then than 12 months of contract term remaining before they formally approach for renewal talks – thus creating a negotiations advantage because there is little time left to switch if the bank is unhappy.

Similar to the Millington situation, the bank had little time [then] to make a processing change – a process that can take 12 to 18 months – and so they signed FIS’ standard form agreement. The complaint states that FIS insisted that “…every bank with whom FIS does business are required to sign this [standard] agreement…” and there was no negotiating option for Millington. Accepting this statement, the bank may have found solace (other bankers signing the same) and then signed anyway.

Fast forward a few years and the bank wishes now to potentially sell, and upon re-examining the addendum, the liquidated damages clause unfairly benefits FIS with termination fees for services that FIS will never actually deliver.  The complaint continues that one of the techniques deployed by FIS to coerce a customer bank into paying liquidated damages despite a dispute as to their legitimacy “…is a tacit or explicit threat to withhold the decommissioning, conversion and integration of data required by the merger or acquisition unless the customer bank commits to making the liquidated damages payments and then makes the payments upon the consummation of the merger.” 

Millington finishes the complaint with a demand for the court to rule the termination fees inapplicable, illegal, unenforceable and void.

Suppliers Unfairly Set the Rules, Not the Buyer

The Golden Contract Coalition (“GCC”) mission is to forever change the way these core & IT suppliers contractually conduct business.  One bank alone – such as Millington – has little power and few alternatives but to fight it out in court one-on-one vs. the multi-billion behemoths of FIS, Fiserv or Jack Henry.  Only many banks together in a coalition such as GCC is there a chance to manufacture the necessary leverage to change the game. 

Learn More

With respect to the Millington complaint: Why should FIS have any security interest (liquidated damages) in the second term of a 12-year relationship? Certainly it is reasonable for any supplier that begins a NEW relationship with a bank to be harmed if a customer terminates the contract for a merger in the FIRST CONTRACT TERM because the supplier would have start-up costs, operational investments, etc. into that relationship and might not have reached ROI yet. But is this appropriate in the second, third or fourth long-term renewal? No way. Is it legal for FIS to refuse to provide access to the bank’s own database and therefore interrupt the planned merger of two institutions if they are not paid fully in advance – even if there is a dispute between the two companies?  Probably Not. FIS must show that they are being harmed by the merger and cessation of services and then they should further prove that the liquidated damages they seek are financially reasonable. 

Outside of the community banking industry in other outsourced IT environments it is generally understood that liquidated damages should be no greater than the “Discounted value of remaining Net Profit”

Jack Henry typically forces a 100% termination fee, Fiserv and FIS at 80%.  In what alternative universe is an IT service provider promised 50% to 100% of their entire contract value if their customer decides to terminate? What if the service they are providing is non-competitive and the bank is forced to buy another more competitive alternative from a different fintech supplier – should that institution still be forced to pay 50%, 80% or 100% of the value of their services?  Their oligopoly is powerful and in the lack of any outside competition the big three core IT suppliers are getting away with just about anything they want.

Banks contemplating a merger (buy or sell) need to review their agreements NOW and implement provisions that eliminate the Silent Shareholder (blog post we wrote in 2017).  Too many banks have unwittingly signed these agreements again and again and over several decades, making these terms institutionalized and nearly impossible to change one bank at a time.

We will keep you posted on developments, but typically core IT suppliers wisely settle lawsuits out of court and secure gag orders and non-disclosures on the results. The public and the rest of the industry remain stuck in the dark about the details.

Email Me The Legal Complaint

Fiserv, Fidelity (FIS), and Jack Henry & Associates (JHA) control 85 percent of the core IT services processing for banks with less than $1B in assets and 93% of the market for those above. By any definition, they possess a market oligopoly. 

For decades, they’ve swung that weight around at the bargaining table, negotiating rotten deals with unwitting community banks and credit unions while simultaneously stunting these financial institutions’ potential for growth by limiting access to innovative, more competitive technology offered by a new wave of friendly fintech suppliers.

Alone, community banks and credit unions entering contract negotiations with core IT suppliers are practically powerless because they aren’t privy to the terms and conditions core IT suppliers offer other financial institutions of similar size and solution set.  Bank executives are left to guess what seems fair and priced right. Even with the help of an expert negotiator like Paladin fs, a major portion of master contract and business terms remain chiseled in stone because of decades of automatic acceptance by thousands of banks.

The Golden Contract Coalition was formed to give community banks and credit unions the strength in numbers they need to stand a chance of changing these immutable terms. After decades of hitting a brick wall while trying to renegotiate these line items, numerous banks realize their only hope of securing balanced, pro-buyer terms lies in banding together.  As a result, banks from all over the country are joining the Golden Contract Coalition in an effort to generate real leverage to change the game — and level the playing field once and for all.

Learn More about the Golden Contract Coalition.

When a Legion of Institutions Speaks with One Voice, Suppliers Are Forced to Listen

While each supplier claims they’re fair and willing to make ‘tweaks and changes’ to master contracts and pricing, a self-serving myopic view prevents them from understanding how the lack of technological innovation, absence of SLAs and forced exclusivity clauses are killing the banks they claim to be serving.  Long, painful contract negotiations conflate the issue, and at the end of the day, banks and credit unions accept unnecessary franchise risk left embedded within these contracts when they choose to go it alone during core IT supplier contract renewal negotiations.

Banks and credit unions can solve these problems much more effectively as a group because there is power in numbers.  Together, they can leverage bargaining power to secure more equitable core IT contracts and a more equitable starting position in every negotiation across the entire industry, with all parties involved saving money and time — a win-win for both banks and suppliers.  And, with the transparency of everyone’s cards on the table, trusted partnerships are built and sustained for the long term.

One Contract to Rule Them All

In 2016, Paladin fs engaged the law firm of Pillsbury Winthrop Shaw Pittmanto create a standardized, contemporary and fair ‘Golden Contract’ for community banks and credit unions that mimic the IT outsource agreements outside of this industry, giving rise to a powerful alliance of banks and credit unions called the Golden Contract Coalition. Members will ultimately enjoy the abolishment of excessive legalese and self-serving conditions from core IT agreements, which will in turn lower vendor risk, increase competitive options and hold suppliers accountable to perform or perish.

The Golden Contract is a customizable, yet commercially balanced, template for financial institutions and core IT suppliers that incorporates the basic needs and benefits that today’s legacy contracts are sorely lacking. These include such necessities as measurable SLAs, an option for exit in case of M&A that isn’t egregiously in favor of suppliers, and provisions for adopting innovative fintech solutions cost-effectively if the suppliers’ solution is either substandard or nonexistent.

The Golden Contract can be easily modified to fit the needs of any individual financial institution. Because it will begin any negotiation on an even playing field and therefore will slash many hours of negotiation time for all parties involved. And though core IT suppliers may not yet realize it, they stand to benefit from the Golden Contract as much as the community banks and credit unions it was designed to serve.

When Local Banks and Credit Unions Succeed, the Entire Industry Wins

The Golden Contract is the foundation for creating a relationship between financial institutions and core IT suppliers that is sustainable, and that empowers both parties to thrive in the age of increasingly innovating financial technology.

The irony of the way the current system works is that core IT suppliers are effectively shooting themselves in the foot by not offering fair terms to community banks and credit unions. By providing wholly unenforceable SLAs, making mergers and acquisitions prohibitively expensive, and blocking financial institutions from acquiring the latest fintech by making it completely unaffordable, they’re torpedoing community financial institutions’ ability to compete. And without that competitive edge, these institutions will not survive with the times — meaning core IT suppliers will ultimately lose a significant portion of their client base.

Ready to Go for Gold?

Simple, fair and universal terms strengthen the entire financial ecosystem.  By eliminating distress previously caused by unfair contracts and business models, Golden Contract Coalition members are more profitable and suppliers earn happy, long-term clients.

Contact us to learn more about how your community bank or credit union can benefit by joining the Golden Contract Coalition.