ABA Banking Journal - May/June 2015 - (Page 11)
Solid to the Core
HOW ONE BANKER BROUGHT CORE PROCESSING
COSTS INTO LINE FOR HIS GROWING BANK
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
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
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 servicelevel agreement with significant costs for measurable nonperformance 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."
THE TEN COMMANDMENTS?
"No one ever confused Capitol Hill for Mount Sinai. But some today think the Dodd-Frank Act is
as set in stone as the two tablets of the Ten Commandments. That's the wrong way to think about
any legislation. Every law can be improved, and Dodd-Frank is no exception. The sooner we stop
pretending that the law is holy writ, the sooner we can make Dodd-Frank work better for American
families and small businesses." -ABA President and CEO Frank Keating, USA Today, Jan. 25, 2015
aba.com/BankingJournal | ABA BANKING JOURNAL
Table of Contents for the Digital Edition of ABA Banking Journal - May/June 2015
CELEBRATING A TRADITION OF INNOVATION
SOUND RISK CULTURE
AN INTERVIEW WITH FDIC’s MARTIN GRUENBERG
NEW RESPA/TILA MORTGAGE DISCLOSURES
BANK DOMAIN ROLLOUT
ABA COMPLIANCE CENTER INBOX
FROM THE STATES
BANKER RECOMMENDED READING
INNOVATIONS IN SOCIAL RESPONSIBILITY
INDEX OF ADVERTISERS
ABA Banking Journal - May/June 2015