By Ray Birch
MEMPHIS, Tenn.—Credit unions must pay close attention to the third-party contracts they are signing for new and emerging payments channels, because if they don’t, they are going to pay too much for vendor support in the years to come, one person is warning.
Patrick Goodwin, president of Strategic Resource Management (SRM), which manages and reviews vendor contracts for financial institutions, told CUToday.info that a common mistake credit unions make with third-party contracts is not looking far enough down the road.
“I remember 17 years ago, when I started at SRM and started doing assessments of credit unions’ contracts, Internet banking and bill pay had just come out,” recalled Goodwin. “These things were small expenses back then, but today they are big expenses. That said, I think credit unions need to look closely at the new and different payment channels and how payments will be processed in the years to come. I think Visa and Mastercard will still be running the payments transactions over their rails, but there are other ways members are transacting today, such as with mobile devices.”
How expensive will new payments forms become? Goodwin said that is not an easy question to answer but one which credit unions should create some estimates around.
“Credit unions need to look at this because these new payments channel expenses are likely to grow, as did Internet banking,” he said. “And, if the contract is not negotiated well and it covers several years, as they typically do, credit unions will be paying too much—simply because transaction volume was not there when the contract was signed.”
Goodwin said that is a good example of what credit unions face today in managing their vendor contracts—many not negotiated well when first signed, and then simply renewed without doing industry benchmarking to determine what is the best pricing.
Goodwin insisted that credit unions need to take a holistic approach to vendor management, centralizing the process and getting away from contract decisions being spread out across the CU and siloed.
“Are you bidding out vendor contracts to get the best pricing? Are you accessing benchmarking data to make sure you get best-in-class pricing?” asked Goodwin, who said his experience has shown credit unions acting unilaterally typically do not receive the best vendor pricing.
He noted that payments processing is a large expense area, and one that needs to be managed closely.
“I’d say that 30% to 35% of credit unions are paying too much on their payments processing contracts,” Goodwin said.
One of the reasons CUs often fail to get best-in-class pricing for payments is that they negotiate these contracts about every three to five years, as opposed to third parties such as SRM that see several hundreds of these contracts annually.
“If you are reviewing these contracts every three to five years there is a high likelihood you will make a mistake,” Goodwin said.
If the credit union is handling this task itself, the person in charge should have strong analytical skills, Goodwin said, and be able to speak the language of each of the payment processors under consideration, which are often not the same.
“A big mistake here is not considering alternatives,” said Goodwin. “If a vendor has done an incredible job of selling and servicing the credit union over the years—and these relationships could be ten-plus years old—the CU often may not consider another provider. Over time the vendor’s pricing may not have stayed in line with the market. Vendors, after all, are for profit.”
Another issue, added Goodwin, is credit unions not holding vendors to performance standards.
“From an audit perspective, I think a lot of our CUs don’t audit the vendor to make sure they are compliant with their contract, and in most cases there are not specific service level agreements in place,” Goodwin said.
If the credit union is managing its vendor contracts itself, Goodwin insisted again that the CU centralize the process.
“Manage the vendor base holistically,” he said. “Have in place a single point of contact for your major contracts—possibly the CFO or COO—someone designated for all agreements to go through. But we don’t often see this. What we usually find is contract authority spread across the credit union.”