Is It Time to Review My Data Processing Vendor?

Rick Shockley
July 6, 2010 | COMMENTS

During a recent conversation with a credit union exec I was asked, “If my day-to-day operations seem to be going fine, why should I take the time to evaluate my data processing company?” The simple answer is that you have nothing to lose and may get significant product and price improvement for your credit union. Most importantly, let's look at five reasons why now could be the best time to look at data processing partners:

• Dynamic market conditions
• Outdated technology
• Software features
• Acquisitions instigate change
• Regulatory due diligence

Dynamic Market Conditions

Typically data processing expenses are either the first- or second-highest non-interest expenses for a credit union. Depending on when the credit union signed the last contract or renewal for data processing services; costs may be way out of line with current market conditions. If you let your contract auto-renew you have missed a great opportunity to evaluate your current processor and the pricing. Today's market favors credit unions, given the economy and the aggressive vendor community. There just are not enough sales opportunities to go around. Even if you end up staying with your current vendor you will have the peace of mind that their goals and your strategic plans are headed in the same direction and that pricing stays competitive.

Outdated Technology

Old school thinking says, “If it isn't broke don't fix it.” While there may be some truth to that, there is also a downside. Older technologies tend to be more difficult to incorporate new features into existing code, which also raises the cost. It becomes more difficult to find experienced programmers as most only want to work with cutting edge tools.

Most leading vendors have or are migrating to state-of-the-art utilities and Windows-based environments; the benefits of this migration are three-fold. First this greatly improves the credit union employees' ability to learn new systems, since they are already PC- and Windows-literate; second, it allows the vendors to easily integrate new features using industry standard tools; third, it allows vendors and some in-house credit unions to hire employees with the skill sets to become productive quickly.

Software Features

Premier data processing companies that serve the credit union industry invest in their systems and routinely introduce new features to meet or lead market expectations. Is your vendor among the market leaders and are they providing you with the best system to serve and retain your members? Often times conducting vendor due diligence you may discover new features that you haven't taken advantage of or find that an alternate vendor may better allow you to serve your membership.

Acquisitions Instigate Change

Do you find that your vendor is winning new business or is their market share being depleted? If the later is true there is a chance that your vendor may be acquired or targeted by the competition. If your vendor has been acquired and your system is not the lead system a conversion is likely in your future, it is just a matter of when. At some point your system will follow the death spiral of first going into “maintenance mode” where typically only regulatory required changes will be performed on the system. Later it will be announced that the system is being “sunset” and you will be given a “must be off by” date. You do not want to be the last credit union on a system as the vendor will be reducing support as they wind down the number of credit unions remaining, which may impact support and service.

Regulatory Due Diligence

Last but certainly not least, regulatory bodies are very interested in your vendor management and periodic vendor due diligence. For core processing reviews, check your contracts for:

• Core systems
• Internet banking
• ATM/debit card processing

Critical elements to review are as follows:

• Expiration dates
• Renewal terms
• Renewal notification time frames
• Service level agreements

The optimum time to begin due diligence is in the 36-40 month of contract expiration. Why so early? Doing a proper due diligence can take anywhere from four to eight months depending on the time of year and staff availability. Just generating and issuing a request for proposal can eat up a couple of months of time. Another reason for this time frame is that successful vendor's start filling up their conversion schedule 12-18 months in the future. You want to allow your credit union 8 to 12 months to have the time to invest in the quality of your conversion.

Rick Shockley is president of Financial Core Strategies. Contact him at 317-578-4669 or rick.shockley@fincorestrategies.com.