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Study: CUs, Community Banks Overpay For Core Services
PALO ALTO, Calif. (5/20/13)--Credit unions and community banks aren't doing themselves any favors in negotiating information technology (IT) service provider contracts, according to a survey of executives about their top business concerns and management priorities.

Instead, community financial institutions are overpaying for one of their largest categories of non-interest expense--outsourced core processing and IT services, said "Less Burn, More Return," a report by the Business Performance Innovation (BPI) Network and Paladin fs.

The top priorities for the next 12 months of the credit union and community bank executives surveyed include increasing the size of their loan portfolios and cutting non-interest expenses.

Other key findings:

  • The top business concern of credit unions and community banks are tight net interest margins, 79%; increased government regulation, 72%; sluggish economic growth, 54%; and greater competition from larger institutions, 33%.
  • The top management priorities for the next year include growing loan portfolios, 82%; reducing non-interest expense, 63%; management new regulatory requirements, 50%;  increasing net interest margins, 37%; and adding new technologies and bank processes, 34%.
  • Community financial institutions continue to add new customer-facing technologies and processes, with 90% saying they added new technologies and service in the past three years, and 74% planning to add more services in the next three years.
By restructuring their provider contracts using national pricing data, the executives can reduce costs by as much as 43%, the report said. Those surveyed with financial institutions from $500 million to $1 billion in assets saved an average of about $1 million over a five-year period when they restructured existing contracts based on national pricing data.

"The secret to restructuring a contract with an incumbent vendor is having the right pricing data in advance of negotiations, getting started well before the current contract expires, and negotiating a win-win agreement with the vendor," said Aaron Silva, president/CEO of Paladin fs, which worked with the BPI Network on the study.

"Many community banks and credit unions feel they are playing catch-up with larger institutions when it comes to technology-enabled services for customers. Mobile banking is an area of particular interest," said Silva, adding that contract restructuring can play a significant role. "By restructuring existing core processing and IT service costs, community financial institutions can effectively pay for these new service offerings."


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