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Beware the Dreaded ‘Deconversion Fee’

Letter to the Editor

By Mark Field

Making sure that you have the best technology solutions in place for your community bank is tough enough. Making a change in order to save money or obtain better service should be an option open to every bank. For this reason, you want to make sure you never accept a vendor contract that imposes a large “deconversion fee” on your bank.

A deconversion fee is one that is imposed even if you live up to the letter of the contract, but then you simply wish to end the relationship at the end of the contract term. It means that it will cost you a large lump sum not to continue with your current vendor. Breaking up can be hard to do, but it doesn’t have to be.

Vendor management is not just a buzzword that bank examiners are using these days. It is a valuable exercise to make sure that bank management (myself included – mea culpa) is fully aware of when contracts end and what the ramifications would be for wanting to migrate to another system down the road — be it core, digital banking, imaging or whatever.

There are a few things that CEOs must do in order to protect their banks these cases from being the victim of what I view as essentially legalized extortion.

First, everything about a contract is negotiable between willing parties. Do not be intimidated into thinking otherwise. Just say “no” if a proposed contract contains such a clause, even if they call it by a name other than a deconversion fee. Ask what will happen down the road if you wish to move your bank to another system for whatever reason. Then make sure there is language in the contract that backs that up. Get your bank counsel involved; it’s cheap insurance in the long run.

Second, pay close attention to the “advanced notification not to renew” date. This is the date by which you must give notice that you are (or just may be) considering terminating the contract. Otherwise, the agreement may be considered automatically renewed, and oftentimes for an additional multiple-year term. Make sure you send that prescribed official notice by the due date every time it comes up, even if you have no desire to make a change at that moment. This gives you maximum flexibility, plus better bargaining power when you actually need to discuss pricing, features and other aspects of the renewal.

Third, bankers need to make sure that all master contracts for services with a given vendor — plus any and all contract addenda or amendments that were tacked on later — all have concurrent terms and matching due dates. Otherwise, you need to provide notices not to renew the subsidiary contracts and have them rewritten to exactly match the date of the main contract. This would obviously be a factor with things like internet banking and then adding mobile banking with the same vendor some time later. Make sure the contracts run concurrently and you don’t get tripped up by having multiple due dates.

Do not assume that your friendly account rep will warn you about new “gotchas” when renewing contracts with longtime vendors. As the number of bank charters continues to decrease, competition for your business increases and folks you may have trusted for years are scrambling to make it painful for you to leave them. Even if you have never previously had a deconversion fee in a contract, beware.

Community bankers in Illinois banded together last year to pass a “bank data ownership bill” to clarify who actually owns the data if a bank contracts with whomever to use the data to help provide a service to our customers. The bill doesn’t go far enough to require third parties to return that data to us at minimal cost if we decide to utilize another system later. But each bank can certainly address that in negotiating contracts with vendors or prospective vendors. Years ago, before there were standard formats for things like basic data and check images, maybe it was a daunting task to transfer that data back to the bank. Nowadays – give me a break folks — they can download your whole bank onto a USB thumb drive in a matter of minutes, maybe a few hours for a larger institution. That’s not an onerous burden.

You need to carefully forge the alliances now that you will need down the road in order to keep your independent bank running — independently — for years to come. Don’t let yourself be held captive by anyone.

Mark Field describes himself as “proprietor” (actually chairman-president) of The Farmers Bank of Liberty, Ill., and chairman of the Community Bankers Alliance Inc. (BanCo-op software). Contact him at mfield@fblbank.com.

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