A collection of observations, ruminations, predictions and random thoughts from Cornerstone Advisors.

Learn More

July 21, 2016 by Bob Roth Bob Roth

10 Ways to Tame the Irrational Vendor Pricing Beast

“There’s a fine line between genius and insanity. I have erased this line.” –Oscar Levantdavid_goliath

Here at Cornerstone we spend an inordinate amount of time analyzing the different pricing for third party banking systems. The one consistent thing we see across all of the different service lines is totally irrational pricing – at times to the point where it makes absolutely no sense.

In a prior life, I negotiated large scale enterprise resource management software contracts in the retail and logistics industries (SAP, PeopleSoft, Oracle and so on). These purchases included operating systems, hardware, application software, maintenance—you name it. The pricing for these services was usually rationalized across these industries. Negotiators could expect to get a “street discount” but rare was the truly “special deal.” One might spend a week negotiating between a 27% and 30% discount on a Unix box, but the range was clear from the beginning. Once a system was purchased, upgrades were free, there was little negotiation at renewals, and the price stayed the same for the next decade—regardless of fluctuations in volumes or size. The vendor extended the functionality of the applications normally without charge to keep their customers and extend their sales.

Now, I come back to my roots in banking, and I see the pricing all over the board. It is not unusual for me to see one bank paying triple what another is even after allowing for differences in size and volume. And what blows me away is that, when dealing with banking technology vendors, everything is negotiable. I’ve seen it all. A large bank in the Southeast that has been loyal to its vendor was paying per-account fees that nearly made me choke. A small Northwestern bank badgered its vendor into a pricing structure where the vendor can’t possibly be making margin. The list goes on and on.

One could easily write this off as the vendors taking advantage of their clients and/or a case of “caveat emptor,” or buyer beware. This answer is over simplistic. The vendors I work with are good people trying to help banks find solutions. The real answer is more complicated and says something about the peculiarity of banking technology. Here are some reasons we are where we are:

The vendors have little discipline in pricing.

The key vendors in banking technology have never been known for having list or book pricing. In fact, up until the late ’90s one of the largest vendors didn’t have a list price. At the time, the IRS required this vendor to develop one to comply with GAAP accounting rules relating to booking revenue. Now it has one but I bet few banks have ever seen it.

At some vendors, deals are left to the division heads versus ratified at the mother ship. This can cause large swings in pricing variance over time. As sales in the banking technology world are commission-based, there are very large incentives to cut deals. In the ’90s and early ’00s, pricing was very much the Wild West. Today the vendors are left trying to corral their troops.

To further complicate things, consolidation in the vendor market has led to extensive turnover in the sales force. Through all this churn, one thing remains the same: vendors do not proactively go to clients to reduce fees. Vendors understand the risk of having some clients find out they are getting killed on fees, but the vendors can’t do anything about it because they have too many offsetting deals where they are losing money. Verizon may call a customer and tell her there is a better phone plan with fewer minutes available. FIS, Fiserv, Jack Henry and the like will not.

Price compression funds new services.

In most industries, the further functionality of existing business applications is funded through non-negotiable maintenance fees. In banking, if the vendor develops anything, it is usually sold as a new product. Still, vendors know customers aren’t going to keep paying more and more forever, so they negotiate with customers at renewal time to lower their existing fees to fund new services. If you don’t believe me, at your next renewal, just try to get a large amount of price compression without any offsetting revenue for new services. You will quickly learn how much leverage you don’t have.

As it turns out, with this “compress and add” approach, the banking vendors end up participating in the funding of additional functionality to banking applications. They just make their customers jump through negotiating hoops to do it.

Hurdles to entry remain high.

Because the bar to entry of new banks remains so high, vendors have developed “de novo” pricing models. . This doesn’t exist in other industries. Vendors have pricing for a start-up bank that is really very beneficial … at first. It allows the bank to “pay by the drink” for a handful of accounts, which is pretty nice for Day One bankers, who can use capital to extend loans, not buy technology. A trucking company would never be expected to operate this way. When a trucking company buys accounting and logistics software, it pays the same whether it has one truck or 1,000.

This de novo pricing has its pitfalls. It takes forever for a bank to recover from what we call a “de novo hangover” – as many as four or five terms of effective negotiations to get per-account pricing even with peers. It can be two decades for some of these systems.

Loyal followers, there’s a lot of pricing weirdness going on out there. To combat it, we offer GonzoBanker’s 10 Ways to Tame the Irrational Vendor Pricing Beast:

  1. Know your opponent. Hopefully our shedding some light on these subjects will help bankers be better prepared to deal with their vendors.
  2. Don’t accept discounts at face value. A 20% discount in banking technology could leave a banker 15% to 20% above market.
  3. Enlist the help of someone who can see behind the curtain. This is a very opaque market. It’s going to be that way for the foreseeable future.
  4. To the extent that you can, hold off on new product purchases until renewal time. Buying in bulk will give you leverage with the vendor to compress your current prices.
  5. Work hard on cost of living adjustment limits. Vendors are going to increase the bank’s pricing by what the agreement says it can. The bank may not get an increase in its net interest margin, but it will get an increase in its technology pricing.
  6. Realize this isn’t about trusting the vendor. Technology sales execs are human, too, and they are working within a system that has constraints on what can be done.
  7. When a vendor says you have “special pricing” or “best in class,” understand that this could be a true statement. It just may not be a good “special.” Or you could be best of a bad class.
  8. Nothing gets the vendor’s attention like issuing a request for proposal at renewal time. Vendors are only going to negotiate aggressively with those clients that show signs of being serious about leaving. Issuing an RFP is one of the clearest signs.
  9. Align your termination dates. Everything added during a term should be set up to terminate at the same time as the master agreement. Leverage only comes if you can move your services. If your termination dates are strung out, it becomes much harder to convince the vendor you could move.
  10. Emphasize levels of service from the start. Don’t wait until the end to talk about levels of service. As you grow and customers become more demanding, your vendor “partner” needs to share in the promise of keeping key systems available.

There are advantages to this vendor pricing weirdness. It makes our extremely dull jobs as negotiators a little more interesting. We get our jollies out of helping our GonzoBanker friends level the playing field against the vendors. And there is nothing like seeing a price that is three times above market to get our juices flowing.

Playing David to the Goliaths out there is more entertaining than having our eighth vendor call of the day. We hope we’ve pulled back the curtain surrounding vendor pricing a bit for you today.




Team your best negotiators with experts from Cornerstone Advisors and arm everyone with the wealth of data in the Cornerstone VaultTM

The Cornerstone VaultTM contains up-to-date pricing from more than 2,000 negotiated contracts for more than 50 vendors.

Visit our web site or contact us today to learn what peer prices are for your vendors and what other vendors would charge for similar services.



Filed under: Core Processing, Vendor Buzz

Print This Post

July 8, 2016 by Ron Shevlin Ron Shevlin

Is the Customer Experience All It’s Cracked Up to Be?

Considering the number of times the term “the customer experience” is used in business circles every day, you would think it was a well-understood concept.

I’ve never understood the term. What is “the customer experience”? Don’t customers have many different types of experiences? Don’t different types of customers have — and need — different types of customer experiences?

The Irrational Inconsistencies of Chief Marketing Officers

In a survey from the CMO Council, senior marketers were asked, “What do you believe are the most important attributes and elements of the customer experience to your customer?”

The responses to the survey question are fraught with inconsistency:

  • If 75% of respondents believe that “fast response times to issues, needs, or complaints” is important to the (so-called) customer experience …
    … then how can only 23% believe that “fast, easy-to-use tools and service options” are important?
  • If 52% of respondents believe that “knowledgeable staff ready to assist whenever and wherever the customer needs” is important …
    … then how can only 37% believe that “a person to speak with, regardless of time and location” is important? What’s the difference between the two options?
  • If 55% believe that “consistency of experience across channels” is important …
    … then how can only 26% think that “readily available, multi-channel information” is important?

Here’s a question for the marketers who said “fast response times” is important:

How do you think that happens, if not with “knowledgeable staff,” “multiple channels of engagement,” “readily available multi-channel information,” and “multiple touchpoints that add value to the customer?”

What is the Customer Experience?

I’m still left wondering what exactly “the customer experience” is. My search for a good definition has not been fruitful.

One graphic I found (see above) implies that CX (that’s what the cool kids call customer experience) encompasses the product/service, marketing, customer service, point of sale, and call center. So what doesn’t it include?

Here’s a not particularly helpful definition:

Internal and subjective response? Huh?

One website I found had this to say:

“What does customer experience mean? Defining a great customer experience refers to the complete experience the customer has with your business.”

That doesn’t make any sense. I don’t think that statement is even grammatically correct.

CX Brilliance

There’s no denying that “the customer experience” is important to business execs, however.

Three-quarters of respondents to a Customer Management IQ survey rated customer experience a “high priority” within their organizations. A blog post on SAP’s website said that “a Bloomberg BusinessWeek survey revealed that delivering a great customer experience has become the new imperative.”

What we’re left with here is:

  1. The customer experience encompasses everything.
  2. Managing the customer experience is really important.

Brilliant. Simply brilliant.

CX Nonsense

If that’s not enough to convince you that this CX stuff is a bunch of nonsense, read this from a tech vendor’s blog:

“George Colony, Forrester Research CEO, visited the CMO of a very large bank to provide her with her company’s new Forrester CX Index score. Upon review, she remarked that her next biggest competitor, who spent one-fifth the amount as she did on customer experience, had a better score. George explained that it was likely because the way the two companies approached their customers was vastly different. The CMO asked for evidence and George obliged. After reviewing letters from the CEO to shareholders, he found their competitor used the word ‘customers’ much more often.”

There are three problems with this story:

  1. There’s no way the CMO of the first bank knows how much her competitor spends on “customer experience.” Remember the definition of CX? Oh right, there is no definition. Or it’s defined as everything under the sun. I really hope George asked her, “How do you know how much your competitor spends on CX?”
  2. A single CX “score” is nonsense. How can you boil the “total” customer experience down to a single score? Don’t different customers have different quality of experiences due to their different preferences and needs? Please don’t try to convince me that a single score covers a “very large bank,” with all its lines of business, and all its customer channels.
  3. CEO letters to stakeholders have nothing to do with CX. Oh, come on. CEO letters to stakeholders that mention the word “customer” are the proof points for why one bank has a better CX score than another?

The Problem With the Customer Experience

Here’s the problem, and some of you are not going to like hearing this: This whole “customer experience management” nonsense is a reflection of a desire to simplify the complex, and find a silver bullet — the one thing — that can be done to fix a problem and/or achieve success.

Just fix “the customer experience” and your business will have loyal customers who never complain and buy more and more without you even having to ask them to do so! Sadly, it’s not that easy.

Customer Experience Realities

The harsh reality is that you have to take a much more granular approach, and:

  1. Look at individual processes (and/or interactions);
  2. Figure out which processes are most important to your strategy and competitive differentiation (this is actually the hardest part);
  3. Measure your current process performance on specific metrics regarding speed, cost, and quality;
  4. Benchmark your process performance against competitors, peers, and leaders; and
  5. Do something (this doesn’t always happen).

What this means: Organizational attempts to create a “chief customer experience officer” are doomed to fail.

What purview would this individual have? What authority would s/he have to change existing processes and functions that are run and led by other executives? How much of a budget would/should this person have, and out of whose existing budget is this money coming from?

And more importantly: Why aren’t the executives currently managing the processes, functions, and department that produce “customer experiences” already improving “the customer experience”?

Ironically (or maybe not ironically), the same mentality that produced the “the customer experience” mentality–the expedient desire for a quick fix–is what produced the rise of a so-called senior executive position to deliver on that quick fix.

Fixing the Customer Experience

Note to CEOs: Are there parts of your firm’s “customer experience” that are broken? Here’s what you should do:

  1. Figure out which execs run the departments and/or processes that are involved in a particularly broken part of “the experience.”
  2. Get those executives in a room and tell them: “FIX IT. Get back to me in a week with your assessment of WHY this is broken.”
  3. The following week, pretend to listen when they bitch and moan about why things are the way they are, then tell them: “Come back in a week with a plan for how this is going to be fixed in the next 90 days, and with your existing budgets.”

In other words, this isn’t about implementing entirely new applications and systems (which may very well be part of the longer-term plan), but about finding the quick fixes — the changes to workflow, for example — that can make “the customer experience” a little better.

Little changes in the flow (i.e., customer experience) can go a long way to improving customers’ impressions and overall satisfaction. Especially if it’s a process (OK, experience) that they repeatedly engage in.


Filed under: Branch Sales & Service, Call Center, Retail Banking, Uncategorized, Web & Mobile Banking

Print This Post

June 30, 2016 by Brandi Gregory Brandi Gregory

The Payments Stress Test Somebody in the Bank Should Run

MoneyHandAn unfortunate turn of debit card events is happening for financial institutions unregulated by the Durbin Amendment (assets under $10 billion, which is most banks and credit unions). And, it’s bringing unwelcome bad news for non-interest income.

Many banks and credit unions will see non-interest income deteriorate for the following reasons:

Debit EMV issuance/acceptance: the acquirers are striking back.

As the liability for fraud shifted in October 2015, it was a non-event with the exception of the largest financial institutions. EMV Connection reported that 600 million chip cards were issued by the end of 2015 and predicts that number will rise to 900 million by the end of 2016.

The majority of EMV (Europay, MasterCard and VISA) cards on the street are issued by regulated (large) banks, which leaves a much larger percentage of financial institutions that are not yet issuing EMV. Large banks capitalized on the liability shift, and the acquirers/merchants weren’t ready because many retailers held off launching EMV acceptance at their terminals until after peak holiday shopping season. And, the large banks buried the acquirers in chargebacks the likes of which had no historical precedent.

Walmart sued VISA.

You read that right. Walmart sued VISA – again. (It’s that time of the year, right? Fourth of July picnic and a Walmart/VISA lawsuit.) This time Walmart alleges that VISA is violating Durbin by forcing the acceptance of a signature. It isn’t clear how this will be enforced as VISA is not issuing public comments and MasterCard is trying to stay out of it. To put icing on the cake, Walmart recently announced it is no longer accepting VISA cards in Canada over a merchant fees dispute. What are consumers to do if they don’t have an alternative payment method – leave their basket of goods?

While it may be hard for some to imagine VISA ever being denied by large merchants in the United States, keep in mind that the only credit card Costco accepts in the U.S. is now VISA, following its shift from American Express.

Meanwhile, many merchants altered their payment terminals to only accept a PIN on a debit EMV-card-present transaction. This change impacts all debit signature transactions for both MasterCard and VISA cardholders. Savvy consumers can challenge merchants to allow their transactions to be signature transactions, but how many really will?

Banks and credit unions are scrambling because they are rolling debit EMV out to cardholders with the message to perform signature transactions while large retailers like Walmart, Target, Home Depot, Lowe’s and Kroger are not having that anymore. Many banks and credit unions have spent years educating their cardholders on how to transact at point of sale (POS); some still assess a fee for a PIN transaction. And all of that education is being eradicated in just a few short months by acquirers.

If VISA prevails and merchants are forced to allow cardholders to choose their transaction method, it may be too late. Consumers are creatures of habit, so once merchants teach them to use PIN, what motivation would they have to go back to a signature transaction? And even if they did, would it make a difference?

The larger regulated financial institutions are most likely indifferent to this change in transaction processing since Durbin equalized their interchange on PIN and signature transactions. But, the unregulated banks and credit unions should care – a lot. Banks and credit unions should perform a payment stress test that forecasts the impact of volume shifts to non-interest income – just like a credit stress test, but on the other chunk of income that drives banking (not to mention banking relationships).

And just to add to the fun … Kroger sues Visa.

What started as a fraud mitigation effort with EMV is now back to just a battle over what everything seems to get down to: money. Merchants were not happy with how the U.S. opted to implement EMV without enforcing chip and PIN. They tried to force PIN at their terminals (which, if we are being honest, is not the same security as chip and PIN) and it resulted in VISA fining them until it was corrected. VISA even threatened to revoke their ability to accept any VISA debit transactions – a $29 billion impact to the Midwestern grocer. While the terminals still prompt for PIN first, consumers now have the ability to exit out to signature.

In response to the fines, Kroger has joined the growing list of merchants suing VISA. So let’s say VISA wins. What’s next?

POS signature/dual message debit: a disruptor lurks.

Even if VISA wins this lawsuit with Walmart, the coast is not clear for unregulated interchange erosion. The PIN networks are ready to roll out POS signature/dual message transaction processing. Doesn’t that sound like the muscle car of payments processing?

With POS signature/dual message, authorization occurs through the lower-revenue-generating PIN network and settlement follows later in a batch transaction exactly as it happens with VISA/MC signature transactions today. All the large PIN networks have the support ready and are simply waiting on the acquirers to support the transaction type. At this point, there isn’t a need to roll it out since the merchants are forcing PIN. Although it is unlikely that VISA/MC will see their volume convert to other networks, they haven’t pulled their largest lever yet – lowering signature interchange to compete with the POS signature/dual message debit rate tables that traditional PIN networks have created. Either way, it’s a hit to unregulated bank and credit union income on the same pool of transactions.

Three things banks and credit unions can do right now:

  • Run a payments stress test and stay smart. Understand sig/PIN penetration and how it impacts income. Smaller banks and credit unions should now deploy models and stress test to forecast impact just like the big banks.

Smart GonzoBankers might think this challenge could be tackled by aggressively marketing debit cards and making up the shortfall on volume, but the stress test found there was no way to optimally grow over the interchange problem with debit. Bummer, huh? But, at least credit is there as an option that works.

  • Get a credit card issuing strategy. The debit income problem is not going away, and plans are needed to recover as much of the income loss as possible. The majority of debit cardholders also have credit cards in their wallets. And that’s growing largely because big banks were motivated by revenue and the Durbin Amendment to get a credit card in their customers’ wallets.

Community banks and credit unions need to gain (or regain) their position in the wallet and avoid losing both transaction and brand power. If a bank already issues credit cards but penetration and usage are low, chances are 1) the product is uncompetitive; 2) there is no marketing calendar; 3) the product is buried three pages deep on the website; or 4) all the above.

  • Review network participation and cease belonging to more than one PIN network. Maestro or PAVD/Interlink cannot be avoided but the total number of other networks issued in can be.

Stress tests shouldn’t stress you out. So, make it a good summer and happy chipping and swiping.

Shout out to Terence Roche and Sam Kilmer for their contributions to this post.

For every 5% shift in volume from signature to PIN, debit interchange will be negatively impacted by 20%.

Are you prepared to lose 20% of your interchange income?

A Payments Stress Test from GonzoBanker’s mothership, Cornerstone Advisors, can help you get the balance right between credit and debit marketing. Our Payments Stress Test reviews your payments ecosystem metrics and provides an analysis of baseline versus adverse and severe impact scenarios.

Contact us today to learn more.



Filed under: Cards & Payments, Retail Banking, Uncategorized

Print This Post