Booklet: Management Section: Management Considerations for Technology Service Providers Subsection: Financial Information

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Financial institutions should receive sufficient current information from TSPs to perform due diligence and, at least annually, ongoing monitoring. Publicly held TSPs have mandatory financial reporting obligations, which facilitate obtaining financial information. Where mandatory reporting requirements do not exist, such as in the case of privately held TSPs, institutions should obtain contractual assurances that the TSP will provide financial statements (preferably independently audited) at least annually.

Bankruptcy of a TSP can have a devastating impact on a serviced institution. Under such circumstances, the TSP may not be able to provide a 60- to 120-day notification of service termination. In this situation, the serviced institution, not the TSP, would need to find an alternate processing site. Although the user institutions retain ownership to data and should be able to obtain current data files from their TSP, the TSP typically owns the programs and documentation required to process those files. Without specific contract provisions, the TSP may not be willing to make the programs available to the users. These programs are often one of the TSP’s significant assets. Therefore, a creditor, in an attempt to recover outstanding debts, might attach a lien to those assets that will limit the availability of the programs to the users. At this point, the serviced institutions could: (1) pay off the creditor and hire outside specialists to operate the center, (2) convert data files to another servicer, or (3) purchase equipment, license software and begin processing in-house. All of these options are costly and can cause unacceptable processing delays.

TSPs suffering financial deterioration should communicate with customers, seek additional sources of capital, or develop capital plans to alleviate customer concerns as quickly as possible. If a TSP fails to provide proper financial data, the institution should evaluate the significance of the services to the institution and determine whether a lack of information about the financial stability of the company should stop it from entering into a contract or from continuing a contractual relationship.

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