When fintech isn’t accessible: The contractual quagmire of community bank technology

Community banks are entangled in a web of conflicting trends. On the one hand, a 2015 report found that local and community banks are the biggest “winners” in attracting Millennials, with a 5 percent increase in millennial account holders. On the other hand, community bank execs have expressed fears that it’s only a matter of time before their institutions disappear. Community banks are concerned about fintech upstarts, which are less heavily regulated than banks and are cutting into their traditional profit spaces. And indeed, community banks have a hard time competing with the big banks and fintech companies when it comes to fresh technology, such as mobile channels, online banking, mobile capture, P2P, and bill payment. Since this is the technology that customers see and experience, it's no wonder that community bankers are concerned about their futures. However, it’s possible that fintech companies aren’t the tech enemy community banks need to be worried about. Rather, the real culprits of the community bank technology gap would seem to be their three Core IT providers: Jack Henry, FIS, and Fiserv. "When community banks sign contracts [with the big three], they really can’t leave them, they’re locked in," explained Aaron M. Silva, president and CEO of the Golden Contract Coalition, which hopes to leverage the bargaining power of community banks to secure more equitable Core IT contracts for the industry. Silva has another company, Paladin fs, that has been exclusively negotiating contracts against these three vendors for ten years. The breaking point came when Silva noticed that what he terms the ‘oligopoly’ between Jack Henry, FIS, and Fiserv had started to tighten its grip around community banks. "Back in 2009 through 2011, we could complete a contract in 84 days," said Silva. "Today it takes about 84 days just to get a proposal from the vendor." Silva began to see more business and commercial terms unfavorable to the banks cropping up across these contracts and was prompted to take collective action after sharing some of the contracts with a colleague at IBM Global. "He couldn’t believe it," said Silva. "He said, 'These look like they’re from 1985.’ He said there was no way IBM would ever issue an agreement like this." Until now, community banks haven’t really had much wiggling room when it comes to Core IT providers. The big three control 93% of Core IT services in banks with over $1 billion in assets and 85% of the market of banks with under $1 billion in assets, according to FIS FedFis. Moreover, Silva estimates only 4% of the market ever changes their providers in any given year. If the vendors have a 96% comfort zone that their clients aren't going anywhere, they don't have much incentive to innovate. "The big core say that they're innovating and they are, but they're not innovating in a way that allows the community banks to get competitive technology, because they don't have to," Silva maintained. Case in point: one of the North Carolina banks in the coalition purchased seven Bank of America branches. The acquisition of the branches landed them approximately 60,000 accounts, which should have been fabulous, if these branches didn’t suddenly have an over-20 percent attrition rate post-acquisition. The number one reason customers gave for jumping ship was that the online banking experience was awful. "And that was the best stuff that Fiserv offered," Silva noted. So yes, community banks are suffering from a technology gap, but fintech startups aren’t the main bad guys. Sure, some fintech companies are encroaching on community bank territory. But other startups that want to partner with community banks never get the chance. The oligopoly is preventing the market itself from getting competitive solutions to the banks, according to Silva. Jack Henry, FIS, and Fiserv’s agreements are exclusive, and bankers, perhaps without knowing any better, sign them. "The problem is systemic because there's no CIO running banks," Silva said. "These are not technology officers, and if the bank wanted to hire a CIO, if they had the budget to hire one, they wouldn't know what one looked like. And what CIO wants to work in a community bank? Real CIOs want to work in fintech companies." Other potential community bank rescuers are also unable to make much headway against the group of three’s stranglehold. Not every bank lawyer is proficient in technology agreements, and even when bank lawyers do suggest changes to contracts, Core IT vendors have very little incentive to agree to the alterations. Nor is the government coming to community banks’ aid. Silva has shown presentations to representatives of the FDIC and OCC. “I'll ask them ‘Do you care?’ and they'll say, 'Not really'. That's not our bailiwick. We're not in the business of making sure that the bank gets a fair contract," he commented. "Our job is to make sure that the contract is safe and sound and has the proper minimum legal standards. If the banker wants to sign a bad contract that's there problem, it's not our business." Silva’s coalition aims to change the game by introducing the Golden Contract, a fair, open contract worded with clear legal language. Silva has retained Pillsbury LLP, a law firm with a lot of experience in IT contract negotiation, to help put the contract together and negotiate on behalf of the banks and credit unions. This won’t be Pillsbury’s first interaction with the big three - it's negotiated with Fiserv and Fidelity on behalf of the big banks before. Ultimately Silva is confident that the coalition can use its bargaining power to force Jack Henry, FIS, and Fiserv to work with the Golden Contract. Since the coalition’s launch in June 2016, Silva says 125 of 300 target financial institutions have signed up, representing about $1.5 billion in contract revenue for these vendors. So far, the GCC has had informal conversations with two of the three Core IT providers, who have shown interest but wanted to see the terms of the contract. Silva plans to approach them formally late August or early September. "The vendors know that these agreements are unfair. They know they are. They know that the banks know they are, and we're going to continue to educate the market about how unfair they are," Silva asserted. Silva envisions the Golden Contract as a win-win situation for both banks and the vendors, with both sides saving money, time, and building a trusted partnership. However, it's questionable whether the big three view the Golden Contract as anything more than an alternative one-sided contract, one that favors the banks themselves. "The marketplace for financial services technology is competitive, and we respect that our clients have a choice," Fiserv's director of public relations Ann Cave wrote in an email to Tradestreaming. "We are committed to enabling our clients to compete effectively and work diligently to deliver the value they expect every day." But that response suggests that Fiserv, at least, isn't really interested in listening. After all, the lack of choice is just what Silva and the GCC are out to change. "The Core IT vendor oligopoly has taken advantage of community financial institutions for too long," said Gary Findley, a lawyer that sits on the boards of banks and is also a GCC Partner Advocate. "As these institutions attempt to deploy the same competitive, affordable, cutting-edge services as those produced by larger national banks, they’re held back time and again by this technology gap created by their service providers." The GCC could change that.