Too often banks and credit unions make the mistake of plugging vendor costs into their budgets and forecasts without questioning whether those figures can change. The truth is that a savvy institution can find opportunities to reduce vendor costs without switching vendors or impacting service levels by simply asking the right questions.
Here are the top five questions to ask about vendor contracts during budget season.
1. Are you getting the best vendor deals in the market?
Maybe your contract was competitive when you signed it. Maybe it wasn’t. Regardless, things have likely changed since then.
Your institution may have different needs or may qualify for volume-based incentives or better pricing. Market factors, including increased competition, economies of scale or new innovations may have pushed down costs. Or maybe the automatic price increases you agreed to years ago resulted in you overpaying.
Find out by reviewing current vendor pricing, asking around among peers or utilizing third party industry benchmark data.
2. Can you renegotiate existing contracts?
You signed a long-term contract with a vendor and that’s the end of it, right? Not necessarily.
Contracts — even some long-term contracts — can be renegotiated for near-immediate savings. It all depends on the vendor and the contract language. Standard debit and credit processing contracts, for example, might be open for renegotiation (and savings) 24 to 36 months before they are up.
Others are willing to renegotiate now for goodwill to ensure they keep you as a customer later — especially if you’re paying above-market rates. Consider a client of ours that asked us to review a 12- month-old core processing contract. We found a seven-figure gap between our benchmarks and what the institution was paying. With the right negotiating strategy, the client was able to renegotiate a contract that had seven years left on it — at a price much closer to the market rate. It’s an extreme example, but proof that it’s always worthwhile to ask.
Just remember, while you can renegotiate a contract, you can’t break one. If you want to change vendors, the new vendor would likely have to buy out your existing contract — a move that’s rarely feasible.
3. What does revenue cost?
When it comes to revenue generators like credit and debit cards, institutions usually focus on one specific line item: net income, and how to grow it. Yet there are costs associated with that revenue, everything from fraud to marketing. Banks and credit unions can increase their margins by decreasing these costs.
The opportunity is there, especially in card network agreements. The card network providers enjoy close to 40 percent profit margins, and the market is very competitive. Since the Durbin amendment went into effect, we’ve seen clients renegotiate contracts to get additional funding for card replacement and reissues, among other things.
You just need an experienced negotiator on your team who knows what they need to be asking for.
4. What contracts are expiring in the next 12 to 36 months?
If you want to be in the strongest negotiating position, you need to look two or more years ahead — depending on how complicated it would be to switch vendors. For debit or credit card processors, you need to start at least 12 to 18 months in advance.
This gives you the ability to evaluate the pricing and offerings of other vendors. If you wait until your contract is about to expire, the incumbent vendor will know you don’t have other options and will hold the negotiating power.
5. When was the last time the bank or credit union audited vendor bills?
Vendor management is a hot-button issue for regulators, meaning your bank has certainly risk-assessed and identified critical vendors. You’ve looked at contracts to see how breaches and other problems would be handled. But have you audited your vendor bills?
It’s not a regulatory requirement, but it is a useful exercise for saving money and optimizing services. Consider phone bills. Telecommunications invoices are rarely accurate. We regularly find our clients paying for lines they disconnected years ago or services for a location they no longer have. Not only can you get a refund when errors are found, but auditing vendor bills forces an institution to review all the services it currently has and eliminate the ones that aren’t needed — like call waiting for a fax line. These may be small amounts when compared to spending on ATMs or processing agreements, but it all adds up in a time of compressed margins and earnings pressures.
As you work through budget season, make sure you take the time to ask these five questions. The time you spend answering them may be one of the best investments you make all year.