Beware the dreaded ‘deconversion fee’

Mark Field

Making sure you have the best technology solutions in place for your community bank is tough enough.  Making a change in order to save your bank money or to 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 which imposes a large “deconversion fee” on your bank.

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

Vendor management is not just a buzz word bank examiners are using these days. It is a valuable exercise to make sure bank management (myself included) is fully aware of when contracts expire and what the ramifications are for wanting to migrate to some other system down the road, be it core, digital banking, imaging, or whatever.

There are a few things that all CEOs must do in order to protect their banks from getting caught up in this costly contractual trap:

1) Everything about a contract is negotiable between willing parties. Do not let vendors intimidate you into thinking otherwise. Just say “no” if a proposed contract contains such a clause, even if they call it by a name other than an outright deconversion fee. Ask point blank what will happen down the road if you wish to move your bank to another system for whatever reason.  Then make sure you find the language in the contract that backs that up. Get your bank counsel involved. It’s cheap insurance, in the long run.

2) Pay close attention to the “advanced notification not to renew” dates.  This is the date by when you must notify a vendor that you are (or may be) considering terminating the contract. Otherwise the agreement is considered automatically renewed and, oftentimes, for an additional multiple-year term.  Then, make sure you send the vendor a prescribed official notice by that due date every time it comes up, even if you have no desire to leave 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, should you choose to renew. Some bankers are skittish about this step, but I have never met a vendor, yet, who wouldn’t gladly renew a bank that decides to stay on board as the actual contract end-date nears.

3) Bankers need to make sure 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 so you don’t get tripped up by having multiple dates involved.

Do not assume 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. Their jobs depend on keeping you under contract, no matter the cost.  Even if you never had a deconversion fee in your contract with them before, beware.

Community bankers in Illinois banded together in 2017 to pass a “bank data ownership bill,” to clarify who actually owns the data if a bank contracts with whomever to make use of our data to help us provide a service to our customers. The bill doesn’t go far enough to require third parties to return that data to us at a minimal cost if we decide to utilize another system later. But each bank can certainly address that during the negotiation of contracts with their vendors or prospective vendors.

Years ago, before 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, companies 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 on anyone.  It’s all about the money and trying to keep your bank paying.

You need to carefully forge the alliances now that you will need down the road in order to keep your independent bank running, well, independently for years to come. Don’t let yourself be held captive by anyone. Be strong, my friends. Be independent. STAY independent!

Mark Field is the “proprietor” of The Farmers Bank of Liberty, Ill., and chairman of the Community Bankers Alliance, Inc. (BanCo-op), a non-profit cooperative that provides core processing services.