Solid to the Core

Marty Caywood’s bank had a good kind of problem.

The Asheville, N.C.-based HomeTrust Bank was growing, with nine mergers and branch acquisitions since 1996. It had expanded from $419 million in assets and 11 locations to $2.6 billion in assets with 45 locations across four states—all while converting from mutual to stock ownership.

As senior vice president and director of information technology at HomeTrust, Caywood’s challenge was to reduce noninterest expenses to help fund M&A activities. But his pre-existing core data processing contract didn’t reward HomeTrust’s growth. It had four years left on it and didn’t include tiered pricing that rewarded growth, even though HomeTrust was bringing ever more business to its processor.

He wasn’t unhappy with the processor, and he “wasn’t looking to be the cheapest person in the room,” Caywood says. “I just wanted to be sure the pricing was fair.”

Bankers are always at a disadvantage when negotiating core processing contracts, says Aaron Silva, the founder of Paladin FS, a consulting firm that helps bankers work with vendors to optimize core processing and IT contracts.

Core processing—which covers processing of data, item, ATM, EFT, online and card transaction processing, as well as network monitoring and server management—is behind the scenes, but it is one of the most important vendor relationships a bank has. That feeling of uncertainty after negotiating a core contract—Did we get a good enough deal?—can contribute to a feeling of distrust and dissatisfaction. “You should approach your vendor with a win-win in mind,” Silva says. “You have to give to get.”

Working with Silva, Caywood was able to negotiate reductions in HomeTrust’s core processing costs. The provider got two more years on its contract with a growing bank. The bank won an immediate cost reduction of $1.2 million—and long-term savings of $5 million to $8 million. HomeTrust is now rewarded with per-account savings as it grows, and the financial incentive for growth brings new business to the core processor with every merger HomeTrust completes in the future.

Silva advises bankers to be realistic about what they can—and cannot—accomplish in a negotiation. Eighty-five percent of the market for core processing is dominated by three big companies, and they know there’s only a 4 percent chance that a bank will switch vendors. Also important: starting the negotiation in the sweet spot for getting a good deal—24 to 30 months out from the end of the contract—and working with outside experts to get a sense of fair pricing. “Bankers forget they get to negotiate a deal once every five to seven years and that vendors are professional poker players that do this every day of their lives,” he explains.

A fair market deal, Silva says, will include the best pricing for existing services and new services, the most relevant business terms, balanced legal terms, a strong service-level agreement with significant costs for measurable non-performance by the vendor, and a term of five to seven years.

Most important, Silva says, is to make sure the contract rewards growth. He cautions bankers not to be distracted by discounts that punish growth, such as signing bonuses or a flat invoice amount. Good discounts, he says, include installation discounts and especially “tiers that reward the institution for mergers.”

The stakes are high—it’s a multimillion-dollar decision that will last for years—but more knowledge leads to a better outcome, Caywood says. “You can now go in with some confidence that the deal is fair.”


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