- Banks are generally at a disadvantage in core processing negotiations as vendors negotiate their forms frequently against many parties and banks do not.
- Core processing agreements contain consequential business concerns, as well as legal issues, to be identified and negotiated.
- Be certain you are well advised and allocate adequate resources to address these concerns.
Outsourced core processing agreements often represent the most significant contractual relationships for regional and community banks. As banks increasingly rely on dynamic and complex suites of third-party technology services, examiners at the state and federal levels have continued to focus on effective vendor management and oversight, including when it comes to negotiating adequate protections and fair terms in core processing contracts.
Critical Contractual Issues
The following issues deserve particular attention in core processing agreements:
- Early Termination Penalties
- Exclusivity – Many vendor contracts provide exclusivity for the vendor, which can hinder a bank’s ability to innovate without incurring penalties.
- Service Levels & Remedies – Service standards should be comprehensive, clearly stated and paired with appropriate remedies such as service credits or termination rights.
- Definition & Ownership of Data & Access to Data – Clear definitions and access rights can be imperative to allow a bank to engage in data mining and analysis.
- Deconversion Fees – Increasingly banks are negotiating for the agreement to include transparent deconversion fees, including any fees to be calculated in connection with a business combination.
- Limitations of Liability
- Ongoing Diligence & Audit Rights
- Co-termination – The agreement should specify a clear termination and, generally, co-termination of all services should be an explicit contractual default.
- Information Security & Business Continuity
- Representations & Warranties
Some banks dedicate considerable resources to the negotiation of their core processing agreements. These resources may include the engagement of third-party consultants and outside legal counsel. When considering whether to bring in outside advisors, an institution approaching a renewal or significant change in its core processing services should consider the following questions:
- Can any proposed changes be addressed sufficiently in an amendment to the existing contract, or is it time for a full restatement (and a full review) of the documentation?
- Is the existing agreement sufficiently detailed to delineate the parties’ legal rights and responsibilities, particularly regarding the issues discussed above?
- Are there strategic considerations, such as a potential combination with another entity or the exploration of a Fintech venture, that may raise complex issues?
- Would it be helpful to have an outside consultant’s perspective on the current market to review key business terms and pricing considerations?
We Can Help You
Our Firm frequently represents our banking clients in the review and negotiation of core processing and other high-stakes technology services agreements. Please contact us if you would like to discuss any of the considerations raised above or if we can otherwise assist you.
Katherine Fritzi Getz is a partner in the banking group who advises financial institutions on corporate, regulatory and securities law matters. Fritzi regularly represents clients in connection with the review and negotiation of business contracts, including a wide range of vendor agreements and Fintech arrangements and partnerships.