Large technology providers are attempting – often successfully –to ensure that credit union clients buy all core, key dataprocessing and third-party products from their firms.

The truth is, no vendor has all the best-of-breed productofferings.

These vendor strategies are self-serving and rarely entail thebest interests of credit unions. Other unwanted outcomes includeoverlooking truly best-in-breed products and possiblynon-competitive pricing. Additionally, cost savings claims areinflated due to the size of the transaction.

Most vendors, like credit unions, use third parties. While acredit union believes it has one point of contact with its vendor,realistically the vendor is managing multiple points of contact.Like the childhood game of telephone, critical information andreaction time are lost in the process.

Even though vendor oligarchy appears here to stay, credit unionsmust be vigilant and take a divide and conquer approach, vettingmultiple vendors so a true best-in-class suite of services isobtained at fair market pricing.

How Oligarchs Operate

An oligarchy is a small body of individuals ruling a state orgovernment. In business, this translates to powerful companies thatdominate the market within niche industries by absorbing smallercompanies and offering what they believe is enhanced servicing.

Credit unions have experienced this over the last decade withincreased frequency, with for-profit companies buying smallercompetitors to edge out competition.

These providers cover a vast majority of the credit uniontechnology space. Aside from a few reputable CUSO systems and newindependent vendor system offerings, a small group of oligarchs(sometimes with the backing of venture capitalists) lead theindustry in service offerings.

These vendors offer highly beneficial products and services, buteven best-in-breed vendors can't do it all. It's simply notrealistic.

Where credit unions can understandably go wrong is in theoligarch pitch: Bundling services for lower pricing. On thesurface, it would seem logical and make sense that one point ofcontact lowers pricing.

However, that's a subjective fallacy. Let's say, for example, acredit union is seeking an in-house data processing system and anonline banking suite. The vendor will look to bundle these servicesas one contract and tell the credit union it is receiving asignificant discount, sometimes pitched as high as one-third of thetotal price.

Also, master agreement contracts covering a larger range ofproducts, under one legal umbrella, can serve as a disadvantage ifand when issues arise.

In reality, these products and services need to be reviewed andcompared separately with a thorough evaluation on the strengths andweaknesses. For example, just because a larger provider buys astart-up with a promising banking software feature, it doesn't meanthe two software codes will integrate. It's not as if they werecoded with that objective in mind. Additionally, neither companywas planning for integration and interoperability. How could itintegrate flawlessly?

It's understandable that oligarchs search for products andservices they do not currently provide. This way they have asolution to fit every need. In theory, this is a sound strategy,but in practice it often leads to service quality issues and lessthan optimum core processing and third-party interoperability.

With varied levels of intensity, vendors push their own productsand even block the development of interfaces amongst one another,as well as with other independent providers. Credit unions need toevaluate this key strategic alliance characteristic.

A confident oligarch willing to work with other providers ispreferred, as the contrary will be restrictive over time andpossibly even harmful.

Credit Union Approach to Oligarchy

A well-prepared credit union shopping for individual needs willlikely receive a lower overall price and better contracts, becauseit could integrate and manage disparate solutions with more freedomand independence. However, the level of vigilant detailed oversightrequired is often best utilized by partnering with experiencedconsulting and legal advocates.

In particular, credit unions need assistance with request forproposals, and core and third party processing integration. Why?Because multiple systems can't effectively communicate with eachother. The result is a lack of data transfer and poorly integratedmember service. Some integrated systems are even missing keyfunctionality and data element transfers.

It's important to remember oligarchs were once individualcompanies. It's difficult enough to work across different businessverticals within one organization, let alone a company that hasacquired numerous smaller companies, creating countless silos.

When a credit union signs a contract with an oligarch for asuite of services, it is essentially dealing with a number of coreand third parties operating under one umbrella, who in turn have towork with the credit union's existing vendors. To this end, theremay be in essence three or four languages being spoken and only onetranslator, who may or may not be fluent in all technology speak.This common scenario leads to confusion and system wide flaws.

Integration of a best-in-class platform with a lesser platformis extremely difficult. In all cases, the inferior platform revealsweaknesses only after implementation. Therefore, it is easy todeduce core oligarchs operate as a composite of vendors as opposedto a specialty firm.

Compliance and Oligarchs

Aside from the countless issues related to integrating softwareand suites of service to ensure member satisfaction, credit unionsare facing huge regulation and compliance pressure.

The American Institute of Certified Public Accountants SSAE 16(formerly SAS 70) audit was developed to ensure a vendor hasundergone an in-depth examination of respective control objectivesand control activities. These are industry requirements. Themajority of vendors contractually agree to be SSAE 16compliant.

In doing so, the vendor charges credit union clients amaintenance fee, a fair and common practice, normally included inthe overall pricing. However, vendors are also charging an extrafee for providing these reports to credit unions, which is unfairand unreasonable.

Credit union executives are overburdened by the complianceprocess. Oligarchs are using this to their advantage, arguing thatone vendor will require less oversight.

Not unlike the bundling theory, there is truth to this. Overtime this formula may mature and become beneficial to the creditunion industry; however, pitfalls and landmines currentlyremain.

For example, as more regulations are being required of vendors,many of the all-encompassing contracts are clearly stating that thecredit union, not the vendor, will be responsible for associatedfees. Again, the credit union is held captive.

Without expert contract review, many credit unions will notfully understand the true cost of these services and whether or notthe vendor is profiting from regulatory compliance. To be fair,there are some vendors that do offer SSAE 16 for free or as part ofa package, but others will charge no matter the circumstance,resulting in thousands of dollars in fees billed to the creditunion.

Conclusion

When it comes to vendor selection and management, is more duediligence required? Yes. Credit unions owe it to members to performthese necessary tasks.

Whether a credit union works with a consultant or not, theorganization's C-level executives must review contracts carefullyand ask these all-important questions early in the process.

With many credit unions outsourcing vendor management to onlineservice providers, these vendors will commonly include a shortalert period, typically 180 days or less, before contracttermination. This is rarely enough time to effectively mediate thetermination of a contract. Vendors understand this process placesthe credit union at a disadvantage.

Credit union executives should conduct contract reviews,negotiations and implementations 24 months before a contract is setto expire, focusing on compliance and regulatory issues as well assystems integration. Credit unions should demand to know whichvendors will be involved in the process and vet them, including acustomized RFP review and selection process. This should befollowed by a deep-gap analysis to determine the right product andservice provider.

This proactive, collective vendor contract approach ensures thatthere is not an automatic default to the oligarch vendor selectionprocess.

Sabeh F. Samahais president/CEO of Samaha & Associates Inc. He can be reachedat 855-772-6242 Ext. 2020 or [email protected].