Silent Shareholders Bleed Out Bank Mergers

Does your Bank increase fees for loyal customers when they bring you new business with other companies and depositors? Do Banks penalize their commercial customers when they merge with other companies, need more capital or financial services? The answer is obviously NO to both questions. Such treatment would be anathema to community banking customer service and relationship building. But unbeknownst to most bank leaders, your most critical vendor would answer YES if they were running your institution.

Nationally, shareholders of merging community banks can expect to pay between $380 million and $410 million in the next couple years for services they will never use or enjoy from Core IT suppliers – taking a major bite out of shareholder equity and precious cash upside in any deal. Talk to any investment banker or attorney familiar with the many material considerations in even the simplest of mergers and the discussion of Core IT contracts will come up as a potential major impediment to getting a deal done – and the vendors know it. Core IT suppliers are essentially a Silent Shareholder that shows up in the dead of night to collect hundreds of thousands of dollars on average (and into the millions on some deals) for termination, conversion, de-conversion and integration services necessary for the surviving institution to complete the merger. In fact, their terms are written such that if you don’t pay many of these fees in advance they won’t hold a date for your future conversion post merger.

Shaming for Mergers

These one-sided payment terms are found in nearly all agreements and put the Bank at a major disadvantage, especially when you might not be thrilled with the incumbent supplier’ services or past performance. Banks are forced to cough up large sums and extend contracts “as-is” with unfavorable legal and economic terms just to make sure the merger goes through smoothly and on time. Instead of reaping the efficiency of a merger by eliminating duplicate IT costs – making an acquisition more accretive – these agreements are written to punish the franchise and shareholders for their success and hard work that made the merger possible in the first place.  Meanwhile, Core IT suppliers pocket the efficiencies of your merger.

Don’t Wait Until After the Dance Begins

While mergers are on everyone’s mind lately, many banks are caught flat-footed when these agreements are not proactively restructured years in advance of any merger. If you call your vendor after the LOI has been signed to ask for a shareholder-friendly conversion and termination quote – they already have you in their vice grips! Smart banks pre-negotiate termination, conversion and de-conversion expenses that are then pre-stipulated based on the processor of the bank they are buying.  Famous business author Stephen Covey said that one should, “Begin with the end in mind” and these contracts are certainly something that must be visited [now] if your goal is to never meet the Silent Shareholder.

Punished for Buying A Bank and Bringing More Business

If your favorite business customer purchased another business – doubling in size – and then asked your bank to extend a larger line of credit or increase the number loans to help them expand – would you punish them, double their interest rate or charge them outrageous refinance or admin fees? Probably not, but Silent Shareholders are allowed to do this at nearly every merger opportunity.

If your customer “Fred” came in one day and said he talked all of his 200 co-workers into leaving Bank of America and Wells Fargo to move all their accounts to your Bank – would you thank Fred by handing him a bill for the employee cost necessary to open all of those new accounts? Sounds ludicrous, but this is exactly how your Silent Shareholder will punish your Bank for bringing them net new business they never paid $1 to acquire.

Buying A Bank with a Different Processor

Let’s say for example you are a Fiserv-processed bank and you buy an FIS-processed bank of similar size and account volumes, doubling in size. Your shareholders put up all the money and equity to bring in the deal while your partner Fiserv will penalize you financially with conversion and integration fees to thank you for the net new revenue to their top line and simultaneously killing one of their competitors (FIS), Mind you this was completed without their sales team having to buy so much as a lunch for anybody. Said in a different way, Fiserv incurred $0 acquisition costs to capture that FIS-processed bank and then your shareholders shower them with more money for the privilege. Fiserv should reward your Bank for doing the deal in the first place, not penalize your shareholders. That’s called “partnership” – right?

Buying a Bank with the Same Processor

When it comes to labor costs, not all service providers follow the same model.  Some types of labor require scaling up to service more customers.  For example, if a restaurant doubles its number of customers, then it will likely need more wait staff.  However, when it comes to IT service providers – especially those offering a hosted or cloud solution – technological efficiencies mean that service providers can take on additional customers with little to no effort.  For example, a Core IT supplier can simply “turn on” leveraged virtual servers in its data center without increasing labor.  In fact, in most cases the cost of service per customer goes down when labor remains flat and the customer count increases.

As a Bank, how does this impact you?  Core suppliers can charge a “termination fee” along with other conversion and de-conversion fees when two existing customers merge. Sometimes they will force you to combine the term and Total Contract Value of both agreements into one so they remain.  But there is no rational basis for these fees or demands.  In fact, if two existing customers merge, then it actually decreases the core banking provider’s costs! This is especially true for a hosted service model, which is essentially “plug and play.”  For example, if Jack Henry is servicing 500 customers in a particular data center and two of these customers merge, then Jack Henry will only have 499 customers remaining to serve in that data center. 
In this instance, labor costs should either stay the same or go down, but the provider’s costs would never go up!  So why do core banking providers impose these additional fees on you and your shareholders?  Because they know mergers and acquisitions activity is common among community banks, and these types of fees are a cheap and effortless way to grow revenue with little associated cost.  They know that shareholders would rather swallow the costs than not complete the merger.

The Golden Contract Coalition Answer

With respect to mergers, these agreements are written to benefit only one party – the Core IT supplier (aka ‘Silent Shareholder’). Suppliers should reward a bank when their shareholders buy a bank processed by a competitor – not punish them. Eliminate conversion and integration fees and start splitting revenue with your “partner” on interchange revenue, etc. since they didn’t spend a dime to woo that Bank in the first place. Suppliers should outright eliminate these expenses and make the investment in keeping their acquisitive customer happy, growing and surviving. – that’s partnership! When a Bank buys another institution processed by the same supplier; vendors should be thanking their stars they survived and passing on operating efficiency to the surviving customer not bilking them with complex algebraic math problems buried deep in the bowels of their contract that ensures the supplier is “whole”.

Members of the Golden Contract Coalition want a new agreement that addresses mergers in a fair way. Members will only do business with those suppliers that adopt the Golden Contract Standard of providing IT services to this marketplace with a fair, balanced and marketing-conforming contract – The Golden Contract.

GCC Update: FIS and Jack Henry Move to Engage, Fiserv Drags Feet

The Golden Contract Coalition has engaged all three targeted Core IT suppliers FIS, Jack Henry and Fiserv in order to open negotiations on behalf of our vast membership of banks and credit unions. A lot has been learned as we work with each company. All suppliers share dismay as to why so many of their clients have joined the Golden Contract Coalition as members. Averaging $1.7 billion in asset size, GCC members range from $150 million to $10 billion in assets per institution and represent the collective leverage of hundreds of millions of dollars in contract value. Each supplier claims that they are fair to their customers and always willing to make ‘tweaks and changes’ to their master contracts and pricing. All feel they have the fairest and most balanced contract on the market, so joining an organization like GCC should not be necessary – right? Our advanced discussions indicate that they really don’t understand just how upset and disappointed their clients are with the lack of technological innovation; inability to hold suppliers accountable for SLA misses; exclusivity clauses that prevent bankers from making competitive technology choices; general contract one-sidedness and lack of any economic or contractual leverage during long painful negotiations at renewal time.

Who will lead by adopting the Golden Contract first?

FIS has clearly demonstrated their interest in leading the big three Core IT suppliers by responding early and favorably to the Golden Contract Coalition demands. While specifics of the actual conversations and negotiations are confidential, senior executives from FIS have seized on the opportunity to sincerely address the wants and needs of the many FIS clients within GCC’s membership. GCC and FIS have held several meetings in November and December to discuss the detailed specifics of the “Golden Contract” that GCC is seeking to secure on behalf its members. More meetings are scheduled throughout December and January as FIS attempts to understand and respond to the key underpinnings and specifics of the industry-changing Golden Contract standards.

Jack Henry and Associates (JHA) has scheduled discussions to begin in earnest with their senior legal counsel in mid-December after business discussions between Aaron Silva and JHA executive management completed favorably in November.  These pre-negotiations helped to set the tone with JHA executives that the GCC membership is not out to hurt or harm JHA but rather strike a more balanced agreement that is easier for their clients to adopt and renew without great legal expense and friction in the future. JHA expressed their commitment to always find a way to implement a fair deal for their clients and remain reasonable.

Fiserv Drags Feet


Unlike FIS and JHA, Fiserv has been very slow to organize their team and respond appropriately to the GCC and its many Fiserv-processed members. As many of its customers know, Fiserv’s organization is very flat and subdivided into many divisions and profit centers and can be difficult to deal with at its highest levels when you need a corporate wide perspective or decision. In November, several senior managers over different business units responded eagerly to GCC goals and negotiation efforts recognizing the need to simplify the contracting process and address industry-wide concerns about the perceived power of the oligopoly over institutions.   However, after first embracing the GCC construct, Fiserv abruptly switched gears and referred the negotiations away from its business managers [for now] and into the hands of their legal executives. GCC continues to work with Fiserv and schedule these negotiations as quickly as possible so that they might have equal footing at the negotiations with their key competitors FIS and JHA.

Some of the largest members within the GCC are Fiserv processed banks averaging more than $2.5 billion in asset size each. GCC believes that Fiserv understands the market disadvantage they would find themselves in if their primary competitors adopted the Golden Contract standards and they did not.

The Entire Market is Watching

Make no mistake, thousands of institutions including just about every state, regional and national association and FinTech company is watching the progress of the Golden Contract Coalition and the business response by the Core IT suppliers.  Core IT suppliers have a unique opportunity to stand up and demonstrate their willingness to do what is right by their customers and issue a fair, balanced, market-conforming contracts and pricing that will allow them to truly compete against the national banks or double-down and make the perception true that they [Fiserv, FIS and JHA] are not interested in the collective demands of the marketplace they claim to serve as business partners.

Introducing the Golden Contract Coalition

The cost, business distraction and uncertain outcomes associated with renegotiating a Core and IT supplier contract can be monumental.

Bankers that go it alone are at a huge disadvantage. Institutions smart enough to retain professional assistance from a company like Paladin fs can do an incrementally better job for their franchise and cost structure by negotiating with information, pricing data and market intelligence in their corner.

Unfortunately, both of these negotiating positions are defensive – you have to do the best with what you have and where you are at that moment. A long and sometimes painful dance ensues – strategizing, maneuvering, threatening and attempting to outsmart the Core IT supplier – all the while knowing that the vendor holds most, if not all the cards.

The oligopoly has grown increasingly strong over the last several years. FIS, Fiserv and Jack Henry now control 85 percent of the market below $1 billion and 93 percent above it. Negotiations are taking longer than ever, even when completed with the help and focus of an outside expert. Tacit collusion is now setting in. Vendors are employing new, competition-free strategies and tactics to bilk every dollar from institutions while laying land mines throughout their one-sided, 2-inch thick standard agreements that will annoy and punish your franchise for many years to come. Just ask any institution that has transacted a merger lately.

Today we are announcing an offensive response to the Core IT supplier oligopoly on behalf of the entire community financial institution industry – The Golden Contract Coalition (GCC). It is a company organized to manufacture unprecedented levels of leverage by pooling the combined contract value found in large groups of community banks and credit unions to change the game – once and for all. Call it a collective, a union, a consortium, a buying group, but whatever the name may be, it will finally create a level playing field between the industry and the suppliers.

How did GCC begin?

The serendipity of a chance meeting with an IBM executive and a $25 million dollar cost reduction in Core IT costs with one banking client planted the seeds of a future coalition.

Two years ago, I met a former executive from IBM Global Services. We talked for a good while about Paladin services and the problem we were solving for our banking clients negotiating against Core IT suppliers. He was skeptical about my reports of how one-sided and predatory the vendors were in our industry and the overall unfairness of their outsourcing contracts and pricing for uncompetitive services.

After all, IBM sold outsourced services to the financial industry all the time and nothing I was saying matched up against the best practices used in contracts by the number one IT supplier on the planet. IBM is the gold standard. I confidentially shared with him a few examples of typical master agreements from FIS, Fiserv, JHA, D+H and CSI. His response was shocking and very evocative.

In short, he said that there was no way any client of his would accept such an agreement in whole or part and that any employee of IBM attempting to peddle such a contract would certainly be terminated. That revelation stuck with me.

About a year later we were retained by a $105 billion asset bank on the East Coast to renegotiate against their Core IT supplier (one of the “Big 3”). The negotiations went very well, as we easily reduced their costs by in excess of $25 million. The most fascinating thing to me was the fact that we literally dictated the new agreement to the vendor. “What the hell is going on here?” I thought. The answer was simple: the power of leverage.

The supplier was willing and able to do anything to keep this client, even if it meant taking a $25 million cut, to avoid losing an existing $100 million long-term contract. The bank (represented by my team) dictated the terms just the way we wanted them and the supplier was willing to guarantee (yes, guarantee) a service level with big penalties if they missed.

With affirmation that the standard master agreement issued by vendors and then signed by unaware bankers sucked more than I ever thought, combined with the first person experience of watching a Core IT executive bending over backwards in the face of real financial leverage, the strategy for GCC was born. With the power of leverage, we are able to impact change on an institutional problem that needs to be addressed. That is what we will do through GCC.

Stay tuned for more upcoming news about GCC and follow us on Twitter!

To learn ever more about GCC, click here.

The Team Fighting For You

While nailing down the specific goals of GCC, I quickly concluded that I needed to unionize institutions together into a collective, building an influential voice backed by their large combined contract values.  I also recognized the need to get some real horsepower behind us from a credible firm that knows the IT game at the highest and global levels.

I needed a firm that could look any Core and IT supplier in the eye and cite text-and-verse from the authoritative sources on just about any term, best practice or legal covenant imagined. When I met with Pillsbury LLP, I knew I had found just the team. 

Understandably, bringing in lawyers can be an alarming notion. However, to get the fairest contracts, it’s vital to bring in the experts. By combining forces with Pillsbury, GCC is unstoppable.

Introducing: Bob Zahler and Elizabeth Zimmer 

Zahler, a partner with Pillsbury is known as the founder of outsource IT contract law, while Zimmer routinely negotiates the largest IT deals in the world.  The combined intellectual property and experience of Paladin and Pillsbury makes it possible to author and then negotiate the first and ultimate “win-win” master contract in the history of the industry – the Golden Contract.

The fact is, we’re not out for blood. We are fighting for fairness and equity.  We’re out for a just master contract that will work as the basis for an institution of any size. Then, we’ll go for right-sized pricing, optimized based on the institution’s transaction volumes and product usage.  We’ll expect contracts with a service level that actually explains what the product will do functionally and then provides a real enforcement mechanism a small institution can execute. 

 We are simply demanding commercial terms that match what is found outside the industry based on examples set by some of the world’s best suppliers.  It’s time to check the vendors and reset the standards. 

Whether the oligopoly knows it or not, the industry is not happy with the quality of the products, services and value they are receiving.  There is a deep-seeded suspicion that bankers are being taken advantage of economically and an absolute certainty they are being held hostage by hidden terms buried deep in the bowels of their contracts.  It’s time to change the game – once and for all.

Stay tuned for more upcoming news about the GCC and follow us on Twitter! To learn ever more about The GCC, click here.