4 minutes
3 tips for success
A credit union’s card portfolio can be its most important revenue source, aside from loans. Even when credit unions are satisfied with the performance of the card processing contracts that support their programs, regularly assessing these relationships to ensure that they are delivering the expected benefits has definite merit.
Because credit union leaders must address so many issues, they may have a tendency to apply the old axiom, “If it isn’t broken, don’t fix it.” However, applying this approach to card processing contracts can leave money on the table—perhaps millions of dollars—that could be applied elsewhere to return value to members. Taking a second look at card processing contracts may reveal opportunities to increase interchange revenue and/or lower overall cost.
This is not to say the contract was not fair in the beginning. It may have been very competitive when signed, but years later—near the end of the typical five-year contract term—certain factors can limit a credit union’s leverage. Changes in the market or the vendor landscape—e.g., consolidation, increased competition, introduction of new technology—all may influence a contract negotiation.
Proactively managing contract negotiations does not necessarily mean switching vendors. Rather, sometimes just by applying a few key principles, a credit union can make its relationship with an existing processing vendor even more valuable to the institution and its members.
1. Engage in conversations early and often. Card processing contracts can require up to 36 months to negotiate effectively. Only allow 12 months for negotiations and any opportunity the credit union would have had to solici competitor bids, redefine growth projections or avoid an auto-renewal will be diminished, giving the vendor an upper hand. If conditions in the market or at the institution change significantly, credit unions may also have the opportunity to renegotiate existing contracts to bring costs closer to market rate before the next renewal date.
One $800 million asset credit union in the southeast has made thorough, ongoing communications a cornerstone of its vendor management strategy in a broad spectrum of areas, from card branding and processing to contracts for its check printing and phone system. In most instances, this has helped the credit union uncover opportunities to improve the value of the relationships it has with its providers. On one occasion, though, this CU’s approach to communications also helped uncover significant monthly savings and additional revenue enhancements by switching to a new card processing provider.
2. Knowledge is power. Card portfolio transaction volume, and therefore the relationship with the financial institution, can be underestimated by vendors, either at the onset of an agreement or over the course of the relationship. If such a disparity is discovered, a credit union should explore its options for renegotiating its contract.
A credit union in the mid-Atlantic region was recently faced with the realization that its debit card portfolio had been undervalued. In this case, the $2 billion institution did not initially have the information it needed to understand how the value of its debit portfolio had been impacted by transaction growth. Once the organization had access to the data it needed to accurately assess the value of the portfolio, it took the steps necessary to address it with the vendor, which agreed to a more appropriate price going forward.
3. Realize that revenue carries a cost. Credit unions can improve their margins on credit and debit card products by lowering their associated costs in such areas as fraud. With the competition stiff between card networks post-Durbin, credit unions stand a lot to gain by discussing with vendors how they can help.
Card relationships have grown complex and require a high degree of attention to their contractual terms and conditions. Change within this part of the industry—e.g., operating rules, increasing or decreasing regulatory pressure, etc.—is accelerating. Given the continuing rise in card use and the 40-plus percent margins enjoyed by some networks, credit unions need to be ready to ask their vendors the right questions at the right time. Often, having the experience and benchmarks required to know what questions to ask will require working with firms in the industry that specialize in this area. Getting the help required can deliver millions of dollars of value that can be put to work for members.
Brad Downs is CEO of Strategic Resource Management, Memphis, Tennessee. SRM has been trusted by more than 700 financial institutions to identify cost savings and new revenue potential in their contract relationships. Using a proprietary database of industry contracts and pricing to establish industry benchmarks, SRM’s thousands of performance-based engagements have saved its clients billions of dollars across a variety of areas. Follow the company @SRMCorp.
