Regardless of whether you are engaging a new vendor or renewing an existing relationship, negotiating a core processing contract is an arduous task. It takes time, attention to detail, and gathering input from a variety of stakeholders (not all of whom may see eye to eye). If your bank has an upcoming negotiation, here are a few pointers from recent experience in the contract negotiation trenches to get you going.
1. Think Carefully About That Extended Term
Seven- and even 10-year initial terms are not uncommon in initial proposals from vendors, and they are often dangled in front of banks as a bargaining chip to gain better pricing. For some banks, this makes sense — they are happy (enough) with their vendor; they do not foresee a material change in their business operations in that timeframe; and the financial benefits make sense. However, if you have had service issues with your vendor, your bank is taking a flyer on a new system or products, or there might be a sale in the organization’s future, those long terms can quickly turn into expensive shackles.
2. New Master Agreement?
If your master agreement document was last updated more than five years ago, chances are good the vendor will pressure the bank into signing a newer version. To be sure, there are good reasons that vendors update these master documents every few years — including shifts in regulatory requirements, best practices, and their own operations — that legitimately necessitate refreshed language. However, that newer version is almost certainly more favorable to the vendor on key performance liability issues like service level agreements (SLAs), limitations on liability, dispute resolution, and product performance standards. Signing a new master agreement might be necessary, but it does trigger the need for a careful review of what has changed since your previous master agreement — and why.
3. Preserve Existing Special Terms
In a similar vein, the first draft of a fresh contract is unlikely to capture any special terms your organization may have negotiated last time around. Vendors have different approaches for memorializing customized terms — some insert a separate addendum that overrides the rest of the agreement, some agree to line-item revisions, and others marry the two approaches — and your vendor may have changed their approach since the last time you negotiated the whole thing. Therefore, it will be important to look back at your existing contract to confirm where you might have previously negotiated for special pricing, termination rights, SLAs, or damages caps, etc. and then confirm those terms (or even better ones!) are incorporated into your new agreement.
4. Check for Coterminous Product Terms
Most current core contracts include a jumble of amendments, addenda, and work orders signed at various stages since the original signing. And this makes sense — vendor products and bank needs both change over the course of the relationship. However, when starting on fresh contracts, you will need to make sure that all of your new and existing products are baked in and subject to the same uniform term. Failing to do this can result in nasty surprise early termination fees if you decide to terminate or not renew and find that a few stray products have an extra two or three years left on their current terms.
5. Confirm Effective Dates and Billing for New Products
I see this one frequently. Say the bank plans to add new or upgraded products a few years into the new contract but is given the opportunity to lock in pricing now — great! But if the effective dates for fees to kick in or deadlines to implement the new products do not align with the bank’s plans, unwelcome surprises await (sometimes including default termination fees). Be realistic about your implementation plans and make sure provisions regarding deadlines and billing dates actually match what has been agreed upon. Most contracts have standard timing provisions for these that often go overlooked by banks and vendors alike until it is too late.
6. Agreements Have Gotten Shorter
Think your new proposed contract is shorter than your existing one? You are probably correct. Many vendors have trimmed down their agreements in the last few years. On the one hand, this can seem like a positive — fewer pages to review and negotiate, right? But one has to ask: What has been removed and why? If you look closely, you will likely see increased references to terms like “service documentation” or “product guides,” with the contract pointing the reader to these nebulous sources for details regarding product performance and functionality. This might not seem like a big deal, but it means that where contracts used to include more details about what the products actually do and how they perform, these terms have been quietly shifted into voluminous internal documents that rarely get any advance legal or operational review by the bank. And most importantly, these documents can be revised unilaterally by the vendor at any time, meaning they cannot be negotiated and can be changed to protect the vendor when it suits them, rendering breach claims more difficult to bring in the event of performance issues. You will have no luck convincing a vendor to move all of this back into your main contract, but you can usually ensure a few key performance terms are incorporated — so choose wisely.
7. Shrinking SLAs
In keeping with the overall trend noted above, SLAs are also shrinking, and I routinely see two key issues. First, if you take a look at your proposed SLA and compare it to one from 10 or 15 years ago, chances are good the new proposed version offers far less coverage. Many SLAs are now limited exclusively to uptime/availability. SLAs regarding processing accuracy, statement accuracy, processing and response time, and similar standards are disappearing from many standard contracts, and some vendors even exclude whole products from their SLA list. Second, the remedies for SLA failures have been slashed. Statement credits may be less generous than in previous contracts, and often they are no longer issued automatically. It is now on the bank to constantly monitor the vendor’s performance and demand credits when they spot an SLA failure (and that assumes the vendor makes the necessary data readily available). Similarly, most SLAs no longer include a termination right for excessive failures unless specifically negotiated.
8. What Is Included for Client Support?
Be sure to review your new contract to confirm what error resolution and troubleshooting support your vendor will provide to the bank. What are the support hours? Are there appropriate resolution time and escalation commitments? How much support has been shifted to “resource centers” or chatbots? Many contracts no longer contain these terms upfront, though vendors will often provide a support schedule to incorporate if asked.
9. Check for Updates to Pass-Through Terms
Vendor terms covering customer-facing products (P2P payment services, remote deposit capture, and security tools, for example) often contain required pass-through terms that the bank must incorporate into their customer agreements. These evolve over time with product functionality and changing fraud liability rules, so it is important to check whether new language here triggers the need to update your customer agreements accordingly.
10. Review Liability for Data Breaches
I would wager every bank has experienced some form of data breach at some point, and most of those originate with vendors. Given how frequent they have become — and the attractive target that bank vendors present to fraudsters — core contracts should now spill a lot more ink on this topic. Be mindful of when the vendor must notify you of an incident, what types of damages the vendor will cover, and what types of events trigger coverage, as well as how these factors fit with applicable regulatory requirements. Additionally, take stock of the limitations on liability and damages caps, which are often located in a different section of the contract. Data breaches get very expensive very quickly, and many contracts contain broad liability caps that do not contain carveouts or separate buckets for costs associated with data breaches.
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