A new study claims that community financial institutions, including credit unions, dramatically overpay for core systems, on average about 24% over “fair market value.”
Institutions in the $500 million to $1 billion range fare even worse, overpaying by on average 29%, which amounts to roughly $1 million over the course of a typical five-year contract, according to the study.
The research was conducted by consulting firm Business Performance Innovation Network in association with Paladin fs, a consulting company focused on core systems. The free report is available here.
In an interview, BPI executive Dave Murray said that in the present environment, financial institutions need to focus on reducing operating expenses and, according to the BPI research, fertile ground for accomplishing exactly that is core system expenses which, said Murray, typically are much higher than prevailing market value rates would indicate.
Multiple factors play into this, explained Murray.
Typically, credit union executives will ask peers what they pay for core services and since most overpay – per BPI – what they hear back are inflated numbers.
Typically, too, suggested Murray, consolidation among core providers has led to reduced competition among the survivors.
He also said that core providers understand that most credit unions deeply fear converting to a new core – so they are less apt to make harsh demands on their provider.
When it comes to getting better pricing, Murray said BPI research suggested that the time to seek concessions is “around two years before a core contract expires.”
That gives the credit union ample time to mount a search for a new provider in case talks fail.
He stressed that there has to be some give in the talks, too, typically with the credit union offering a longer contract term, in return for sharply better pricing.
BPI's big point: “Most credit unions don't have the data to know if they overpaying and by how much,” said Murray, but, he added, most are definitely overpaying and in an era of mounting competition that is unhealthy for an institution's life expectancy.
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