May 2016: Samaha Associates’ CEO Sabeh Samaha’s Op-Ed “How Credit Unions Can Better Manage Vendor Oligarchies” Published in Credit Union Times

May 2016: Samaha Associates’ CEO Sabeh Samaha’s Op-Ed “How Credit Unions Can Better Manage Vendor Oligarchies” Published in Credit Union Times

How Credit Unions Can Better Manage Vendor Oligarchies

By Sabeh Samaha May 15, 2016 – Credit Union Times

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

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

These vendor strategies are self-serving and rarely entail the best interests of credit unions. Other unwanted outcomes include overlooking truly best-in-breed products and possibly non-competitive pricing. Additionally, cost savings claims are inflated due to the size of the transaction.

Most vendors, like credit unions, use third parties. While a credit 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 and reaction time are lost in the process.

Even though vendor oligarchy appears here to stay, credit unions must be vigilant and take a divide and conquer approach, vetting multiple vendors so a true best-in-class suite of services is obtained at fair market pricing.

How Oligarchs Operate

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

Credit unions have experienced this over the last decade with increased frequency, with for-profit companies buying smaller competitors to edge out competition.These providers cover a vast majority of the credit union technology space. Aside from a few reputable CUSO systems and new independent vendor system offerings, a small group of oligarchs (sometimes with the backing of venture capitalists) lead the industry in service offerings. These vendors offer highly beneficial products and services, but even best-in-breed vendors can’t do it all. It’s simply not realistic.

Where credit unions can understandably go wrong is in the oligarch pitch: Bundling services for lower pricing. On the surface, it would seem logical and make sense that one point of contact lowers pricing. However, that’s a subjective fallacy. Let’s say, for example, a credit union is seeking an in-house data processing system and an online banking suite. The vendor will look to bundle these services as one contract and tell the credit union it is receiving a significant discount, sometimes pitched as high as one-third of the total price. Also, master agreement contracts covering a larger range of products, under one legal umbrella, can serve as a disadvantage if and when issues arise.

In reality, these products and services need to be reviewed and compared separately with a thorough evaluation on the strengths and weaknesses. For example, just because a larger provider buys a start-up with a promising banking software feature, it doesn’t mean the two software codes will integrate. It’s not as if they were coded with that objective in mind. Additionally, neither company was planning for integration and interoperability. How could it integrate flawlessly?

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

With varied levels of intensity, vendors push their own products and even block the development of interfaces amongst one another, as well as with other independent providers. Credit unions need to evaluate this key strategic alliance characteristic. A confident oligarch willing to work with other providers is preferred, as the contrary will be restrictive over time and possibly even harmful.

Credit Union Approach to Oligarchy

A well-prepared credit union shopping for individual needs will likely receive a lower overall price and better contracts, because it could integrate and manage disparate solutions with more freedom and independence. However, the level of vigilant detailed oversight required is often best utilized by partnering with experienced consulting and legal advocates.

In particular, credit unions need assistance with request for proposals, and core and third party processing integration. Why? Because multiple systems can’t effectively communicate with each other. The result is a lack of data transfer and poorly integrated member service. Some integrated systems are even missing key functionality and data element transfers.

It’s important to remember oligarchs were once individual companies. It’s difficult enough to work across different business verticals within one organization, let alone a company that has acquired numerous smaller companies, creating countless silos.

When a credit union signs a contract with an oligarch for a suite of services, it is essentially dealing with a number of core and third parties operating under one umbrella, who in turn have to work with the credit union’s existing vendors. To this end, there may be in essence three or four languages being spoken and only one translator, 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 platform is extremely difficult. In all cases, the inferior platform reveals weaknesses only after implementation. Therefore, it is easy to deduce core oligarchs operate as a composite of vendors as opposed to a specialty firm.

Compliance and Oligarchs

Aside from the countless issues related to integrating software and suites of service to ensure member satisfaction, credit unions are 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 has undergone an in-depth examination of respective control objectives and control activities. These are industry requirements. The majority of vendors contractually agree to be SSAE 16 compliant.

In doing so, the vendor charges credit union clients a maintenance fee, a fair and common practice, normally included in the overall pricing. However, vendors are also charging an extra fee for providing these reports to credit unions, which is unfair and unreasonable. Credit union executives are overburdened by the compliance process. Oligarchs are using this to their advantage, arguing that one vendor will require less oversight.

Not unlike the bundling theory, there is truth to this. Over time this formula may mature and become beneficial to the credit union industry; however, pitfalls and landmines currently remain. For example, as more regulations are being required of vendors, many of the all-encompassing contracts are clearly stating that the credit union, not the vendor, will be responsible for associated fees. Again, the credit union is held captive.

Without expert contract review, many credit unions will not fully understand the true cost of these services and whether or not the vendor is profiting from regulatory compliance. To be fair, there are some vendors that do offer SSAE 16 for free or as part of a package, but others will charge no matter the circumstance, resulting in thousands of dollars in fees billed to the credit union.


When it comes to vendor selection and management, is more due diligence required? Yes. Credit unions owe it to members to perform these necessary tasks. Whether a credit union works with a consultant or not, the organization’s C-level executives must review contracts carefully and ask these all-important questions early in the process.

With many credit unions outsourcing vendor management to online service providers, these vendors will commonly include a short alert period, typically 180 days or less, before contract termination. This is rarely enough time to effectively mediate the termination of a contract. Vendors understand this process places the credit union at a disadvantage.

Credit union executives should conduct contract reviews, negotiations and implementations 24 months before a contract is set to expire, focusing on compliance and regulatory issues as well as systems integration. Credit unions should demand to know which vendors will be involved in the process and vet them, including a customized RFP review and selection process. This should be followed by a deep-gap analysis to determine the right product and service provider. This proactive, collective vendor contract approach ensures that there is not an automatic default to the oligarch vendor selection process.