In this time of great challenges caused by a worldwide pandemic brought on by the rapid spread of the coronavirus, financial institutions are a crucial conduit to facilitate stimulus aimed at aiding widespread economic recovery. Government orders and voluntary initiatives to close businesses nationwide to control the spread of COVID-19, have delivered negative economic and societal impacts that must be addressed in the foreseeable future.
With the Global Financial Crisis in recent memory, we recall a time when governments and businesses worked together under dire circumstances to plan and execute a path forward to new prosperity. We will repeat that process to chart a new course out of this health and financial crisis and return to economic growth once again. Financial institutions will play an important role in recovery.
For example, financial institutions are working diligently to continue serving customers under constrained operating conditions while processing record volumes in SBA Paycheck Protection Program (PPP) loans. The SBA stated that it had processed more than 100,000 PPP loans through more than 4,000 lenders by Monday, April 27, 2020. In the first phase of the program, the SBA Administrator reported that the administration processed 14 years worth of loans in 14 days — an unprecedented volume.
There are many stress points evident in the first quarter of 2020 financial reports. Like many businesses, financial institutions were operating efficiently prior to closures and stay-at-home orders introduced because of the COVID-19 crisis. A concern is negative results emerging in reports when more than half the quarter took place under relatively normal business conditions. Now financial institutions are executing business continuity plans and new workplace rules to address the challenges of serving customers during the current crisis and beyond.
Despite the temporary increase in fee income from the SBA PPP, financial institutions must anticipate the likely challenges ahead and develop a plan to weather a downturn. Institutions should be looking for ways to cut costs amid the probable revenue and earnings impact from the post-pandemic loan portfolio quality and margin compression.
With few exceptions, data processing expenses are among the top three expenditures, along with salary and benefits and premises and fixed assets that a financial institution incurs on an ongoing basis. Data processing expenses, which include an institution’s spending on core processing and ancillary systems, are easily addressable cost-reduction targets if the timing is right.
So-called ancillary systems are key applications that surround and interact with the core system. They include important services like ATM/EFT, credit card, online banking, mobile banking, loan origination and servicing, payments, wire transfer, cash management, document management, BSA/AML, IT security, and check processing, among others. With the trend toward outsourcing, IT managed services has also taken on greater importance as a key service and expense for financial institutions. These ancillary systems are as important as the core system because they not only support the key business functions of the institution but also serve as touchpoints for customers.
We also see financial institutions aggressively pursuing new strategies to expand and emphasize digital channels — many that shrewdly started such projects prior to the onset of the pandemic. In modernizing their digital channels, banks are not only reaching more customers, they are doing so with more innovative and integrated applications while potentially reducing Data processing spend. Furthermore, they are making a sound investment in what will become a vital channel through which customers will be served in a post-pandemic business environment.
Financial institutions are also making changes to the digital channel to address a shifting mix of commercial or consumer business, integration to the core system and even because of variable vendor product and support plans. When reviewing data processing systems contracts, grouping ancillary products that serve the digital channel with other important applications and especially the core system, will naturally increase the purchasing power and thus negotiation leverage for the financial institution. We commonly recommend this holistic approach to our clients as it tends to yield the best results.
Financial institutions will do a great service for their customers and shareholders by closely examining and monitoring data processing costs. There is a wide range of pricing models in the industry. The best way to gain insight into comparable market prices is to conduct a competitive evaluation of alternatives. The financial institutions that take the time to do so and start the process 24-30 months prior to contract expiration will see the best outcome — in terms of finding solutions that effectively serve customers and address the institution’s business requirements at the best price and terms.
This goal can be primarily achieved by either negotiating new technology contracts or renegotiating existing technology contracts. While some executives deem the technology review process painful, it nevertheless remains an important part of appropriate due diligence by the institution in a key area that is the foundation of efficient and cost-effective operations. Unless the financial institution enjoys annual contracts, most banks maintain multiyear contracts with the vendors of core processing and ancillary systems. With the opportunity to review alternative solutions and/or address costs only every 5, 7 or 10 years, it is wise to take advantage of the typical contract cycle to carefully review these business-critical applications. If not now, then when?
Bryan T. Di Lella, Senior Vice President at ICI Consulting
Since 1994, ICI Consulting has been a leading bank advisor nationwide. ICI is a consulting firm that supports financial institutions by providing core processing assessments, gap analyses, vendor evaluations, contract negotiation and conversion services. ICI Consulting is well known for saving clients time and money during core processing & ancillary systems evaluations and negotiations with the providers of these business-critical solutions. http://ici-consulting.com/