Here’s how banks and card companies can optimize how they work with third-party service providers and reap the benefits.

Like most businesses, banks and card companies typically tackle vendor consolidation only when they absolutely have to. But reducing the number of third-party service providers doesn’t have to be the drag on resources that most leaders expect.

By dispelling the myths about vendor consolidation, financial services providers can not only take a proactive approach to paring down their external partners; they can also realize a host of benefits, including efficiency, an improved technology stack and cost savings that free up funds for innovation investments.

Triggers for vendor consolidation

Vendor consolidation is often a cyclical process: In a healthy economy, banks and card companies loosen the reins and expand their partner portfolios; when the economy contracts, they cut back.

But banks encounter other triggers as well, including:

• Realignment of teams and distribution of work resulting from the move to Agile software development
  
  
• Aging technology infrastructures that slow innovation and time to market
  
  
• Strategies that are in flux, such as those for cloud and other platforms
  
  
• Regulatory scrutiny, such as the third-party vendor management requirements of the FDIC, Federal Reserve and others

Black swan events are also a trigger, and the pandemic has been no exception. As the emphasis on remote work and digital capabilities heightened banks’ and card companies’ awareness of security issues, the risks of multi-vendor environments became a greater cause for concern.

A pre-pandemic survey found 69% of global security leaders agreed that prioritizing vendor consolidation would result in better security. In the post-COVID economy, interest in consolidation continues to rise: A 2021 survey found that 76% of companies polled plan to change their service provider portfolios.

Dispelling consolidation myths

Not that vendor consolidation is easy. Each organization needs its own tailored process for identifying the smallest number of vendors that will enable it to balance risk and service delivery, especially as banks go toe-to-toe with fintechs, big tech (think Amazon and Apple) and now retailers Walgreen’s and Walmart.

In our work with banking clients, we see several myths that hold banks back from pursuing consolidation and reaping the benefits it can provide:

• Myth #1: Working with fewer partners erodes the bank’s purchase power.
  
  The reality: Business leaders might believe a large portfolio of vendor partners leads to increased competition and greater bargaining power for financial and terms negotiations. But the risk to banks’ competitiveness from relying on an array of often niche skillsets and vendor-specific technologies typically far outweighs any perceived gains in purchase power.
  
  By concentrating purchases among fewer vendors, banks not only nurture a healthy, competitive multi-vendor environment, but they also spend more and become higher value clients, thus building more in-depth relationships with selected partners and positioning themselves to negotiate more favorable terms.
  
  For example, when a multinational financial services company we work with decided to reduce the number of its vendor partners by 20%, it advised internal teams to increase communication with the remaining vendors as part of the consolidation review. It recommended biweekly or monthly check-ins with vendors to ensure clear expectations on strategic commitments.
  
  The additional clarity enabled the vendors to structure new master agreements that aligned with the client’s goals and were supportive of a long-term partnership. The streamlined portfolio enabled the company to sharpen its strategy and give partners the opportunity to earn a larger share of the pie.

• Myth #2: If you wait long enough, you might not have to consolidate.
  
  The reality: Vendor consolidations are often multi-year efforts, and some executives may hope that consolidation decisions will be reversed or delayed so they can avoid the issue completely.
  
  Yet procrastinating only results in smaller windows of time to address stakeholder needs, potentially setting the stage for the disorder that can mar last-minute consolidation attempts.
  
  The most successful vendor consolidations are faced head-on, with well-articulated decisions, executive buy-in and a timeline that keeps the initiative moving. The timeline is key because the sooner the consolidation is executed, the faster the intended ROIs can be accomplished.
  
  Returns can be substantial: Gartner reports that, by rationalizing its portfolio, one large company reduced the number of vendors by 25% and netted an annual savings of 20%. As banks transition to technology companies, that’s a significant savings they can invest in other areas.

• Myth #3: Consolidation is a technology initiative that only benefits IT.
  
  The reality: IT plays a significant role in vendor consolidations, but the benefits extend to business functions and units as well. A streamlined partner portfolio optimizes operations enterprise-wide and primes companies for growth.
  
  What’s more, the business-wide benefits are as relevant for fintechs as for incumbent banks. For example, we partnered with a fintech that relied on 15 vendors to operate its merchant services platform. The platform is a workhorse that processes 170 million authorizations worth $40 billion daily. By consolidating to one prime partner and adopting an outcomes-based delivery model, the fintech gained a more modern, efficient platform.
  
  Equally important, the benefits reached across the enterprise, including customer experience, which improved as a result of new onboarding practices and end-to-end support that resulted from the streamlining.
  

• Myth #4: Vendor consolidation creates chaos.
  
  The reality: Vendor consolidation does indeed bring organizational changes. Yet choosing the right vendor partners also empowers the organization to meet its consolidation goals without the chaos.
  
  Look for prospective partners that understand your bank’s business, have a proven track record of delivery and can work with you to identify opportunities, quantify ROI and drive business outcomes. With the right partners, consolidation can be an orderly process.
  
  Within the span of five months, a bank we partnered with successfully transitioned its multi-vendor merchant platform to a single-source, outcomes-based business model.
  

Amid today’s uncertainty and complexity, banks and card companies can introduce simplicity and certainty into their operations by paring down their vendor partnerships. By doing so, they can realize both economic and business performance benefits that will resonate far into the future.