Short-circuited: Banks have few options to recoup costs of outages

The recent wave of outages that hit websites and smartphone apps at BB&T, TD Bank and Wells Fargo will cost them a pretty penny. But if you think those banks, or others beset by tech glitches, can just go sue their vendors or cash in insurance policies to pay for it all, think again.

Contracts between banks and technology vendors tend to be written in a way that makes it very difficult for banks to sue for damages, according to several attorneys who have drafted such contracts. Insurance is available for these situations, but banks usually don’t purchase it, one lawyer said.

In short, BB&T, TD and Wells probably are going to be stuck with hundreds of millions of dollars of lost revenue, said Daniel Friedberg, an attorney at Fenwick & West who has advised banks and technology firms on vendor contracts.

“The general rule is that the bank will be suffering this loss and can’t pass it on” to its vendors, and the costs will be financially material to earnings, Friedberg said. “Typical software contracts are really sided on behalf of the tech developer."

The three banks declined to name their vendors or say whether they blame any vendors for the problems that led to their recent outages. Banks typically do not share vendor names, and it has to be kept in mind that some banks design their websites or mobile-banking software in-house, Friedberg said.

In any event, website and mobile banking app outages are expensive mistakes for any company. A single hour of downtime can cost a company more than $100,000, according to an August 2016 report by the research firm Information Technology Intelligence Consulting.

But cost estimates can vary significantly by industry. When Amazon’s site went down for about 20 minutes in 2016, it probably cost the online retailer about $4 million, according to DigitalCommerce360. In contrast, the recent incidents at BB&T, TD and Wells lasted anywhere from a few days to nearly two weeks.

When Southwest Airlines experienced an outage in July 2016, it cost the airline between $54 million and $82 million in lost revenue.

BB&T has said it will refund consumers who were incorrectly assessed overdrafts or other fees. Neither TD Bank nor Wells Fargo has said if they will issue refunds.

“Our top priority is to provide our customers secure, convenient and intuitive digital experiences, and our team members work every day to deliver great service to our customers across all of our customer touchpoints,” Wells Fargo spokeswoman Hilary O’Byrne said in an email. “In the event our customers experience an issue, we take the issue seriously and work diligently to resolve it.”

Wells customers had difficulty accessing their accounts between Feb. 16 and Feb. 23, and some could not see funds that they had deposited into their accounts.

BB&T's outage from Feb. 24 to Feb. 27 was caused by an equipment malfunction at one of its data centers, a spokesman said. In addition to its online and mobile banking, BB&T's ATMs and automated phone service were down for part of that time.

At TD, problems arose Feb. 12 amid a software conversion and upgrade. Customers were locked out of mobile and online banking functions. Service was fully restored by Feb. 23.

Banks’ brands can be damaged, at least in the short run. Customers of the three banks who were unable to access their accounts during the recent problems posted angry responses in social media forums. Even the failures of digital channels at JPMorgan Chase for less than a full a day in January prompted a strong backlash.

And employee productivity often suffers in such situations, because banks have to pull workers from other assignments to help fix the outages.

“We recently upgraded our online banking systems,” TD Bank spokesman Matthew Doherty said in an email. “During the upgrade, we experienced technology challenges. Team members worked around the clock to address these issues.”

Costs can also pile up from lost fees because customers cannot complete transactions.

Although banks have few legal options, they may have the ability to wring some financial considerations out of their vendors, said David Tollen, founder of Tech Contracts Academy, which trains businesses on how to negotiate vendor contracts. Most vendor contracts contain language that stipulates a service must function a minimum number of hours.

“The language will say that the systems are supposed to be up and running 99.99% of the time,” Tollen said. “These recent bank outages are way more than almost any of those uptime provisions would ever contemplate.”

Banks also may be able to extract credits on future purchases from vendors for tech services, Tollen said.

Sometimes banks can recover the purchase price of software from vendors if it does not perform as required by warranty, said Scott Hobby, an attorney at Bryan Cave who advises banks and other companies on technology transactions.

“I expect banks would complain [in the event of an outage] and demand the return of the purchase price” from the software seller, Hobby said.

But it would be “very, very unusual” for a bank to seek damages, and likely only if a bank believes it can prove fraud, intentional misconduct or gross negligence by the vendor, Hobby said.

Banks could purchase business-interruption insurance, but most don’t because the premiums are cost-prohibitive, Friedberg said. In addition, insurance companies might argue that online and website outages aren’t covered.

All that said, if a bank was inclined to try to pursue litigation against its tech vendors, most tech companies would probably try hard to avoid a legal battle and offer some kind of financial compensation, Tollen said.

“Banks are the customers that every tech vendor wants,” he said. “The amount of technology that a large bank buys is just staggering. You want to go the 100th mile to take care of a contract that big.”