Third-Party Vendor Risk Management for Financial Institutions

Third-party vendor risk management for financial institutions is a key area of concern due to the sensitive and high-risk nature of this business niche.

The practice of third-party risk management (TPRM) encompasses the analysis and mitigation of risks that are associated with third parties such as contractors, vendors, and other non-employees who work with an organization.

Financial institutions work with many third parties who could potentially pose a risk to the security, reputation, financials, and overall integrity of an organization. These third parties can include everyone from the receptionist from the local temp agency to an IT contractor called in to help with a one-time project, to the investment specialist vendor who has partnered with a bank to offer on-site advice to a bank’s customers. Any one of these individuals holds the power to cause tremendous damage in a monetary sense, in the legal arena, and also in terms of PR or even regulatory compliance.

As you can imagine, banking institutions and other companies within the financial sector are at especially high risk of being targeted by unsavory characters. When money is involved, third-party risk management becomes even more important because there is a higher than average chance of falling victim.

Maintaining Regulatory Compliance as Part of a TPRM Strategy for Financial Institutions

In the U.S. and beyond, banking institutions and others within the financial sector are required to adhere to very stringent guidelines and requirements. Compliance is mandated by not only the government but also by industry-recognized regulatory groups that have the ability to issue hefty fines in cases of non-compliance.

For the financial sector, “compliance” spans a broad range of areas, from digital security measures and data encryption requirements, to record-keeping criteria and so forth. Additional action is certainly required to achieve robust third-party risk management. But the good news is that by achieving regulatory compliance, these organizations are implementing measures that will serve as a good foundation for minimizing risk. In short, achieving and maintaining regulatory compliance serves as a solid first step in a TPRM strategy for banks and other financial institutions.

Minimizing Access for Third-Parties to Minimize Risks

Perhaps the most important rule for a solid financial institution third-party risk management strategy entails minimizing access. When you provide only the minimal amount of access required to complete the task at hand, you are reducing risk.

It can take some extra time to create custom user permissions on a software platform, for instance, but the time and effort is worthwhile. Otherwise, it is a bit like giving a third-party keys to a kingdom that they do not — and should not — need to access. It is an unnecessary temptation that opens the door to problems.

This underscores the importance of working with your custom software developer and IT team to ensure that administrators have highly-precise control over who can access various areas of the organization’s digital infrastructure. These controls are critical for good third-party risk management since many vulnerabilities are rooted in digital infrastructure.

Reference and Background Checks as Part of a Financial Institution’s TPRM Strategy

In many industries, reference checks and background checks are prudent best practices where it’s wise — though not imperative — to perform these checks. But in the world of finance, these checks are an absolutely critical part of third-party risk management.

As creatures of habit, humans repeat behaviors. This rings true for dishonest behaviors such as theft or fraud. For this reason, it is extremely important to check a company’s reputation before hiring a vendor, contractor, or another third party. A reputable, honest business will have no problem providing a prospective client with references. Take the time to reach out and discuss the reference’s experience working with the company or individual in question.

Remember that written testimonials and reviews can offer some good insight, but take these with a grain of salt because they are easy to fabricate. Place the most stock in your own in-person conversations with references.

Many companies perform their own screening and background checks on the individuals who work for them, but it is possible that an individual could commit a crime after that original check. Therefore, banks, financial institutions, and others within a high-risk industry ought to run their own checks on any third parties that they plan to hire.

Third-party Risk Management Software Platforms

Financial institutions can benefit from the use of third-party risk management software, which works by using questionnaires, machine learning, and artificial intelligence (AI) technology to evaluate individuals and their risk level.

These TPRM software interfaces actually get more accurate over time since their AI- and machine learning-powered algorithms are enhanced as more data is accrued.

Of course, no technology is foolproof and this rings true for third-party risk management software. That said, this technology can serve as a good supplement to a well-developed TPRM strategy.

Additional Tips for Better Third-party Risk Management for Financial Institutions

Financial institutions within the United States can find some great third-party risk management guidance from the American Bankers Association (ABA). The organization routinely releases advice for avoiding problems with dishonest vendors, contractors, and other third parties.

The American Bankers Association also hosts training events and webinars to provide additional insights and guidance to business leaders within the financial sector. These resources can go a long way toward helping organizations learn about the newest threats and tactics, in addition to the latest TPRM best practices.

The right third-party vendors and contractors can benefit a financial institution by performing essential services, reducing overhead and delivering cost savings, expanding an organization’s service offerings and filling in staffing gaps that may exist. But third parties pose a much greater risk than a trusted, longtime bank employee, thereby necessitating the development of a well-strategized third-party risk management plan.

At iTech, we understand the TPRM-related challenges that financial institutions face, specifically when it comes to an organization’s technology. Contact the team at iTech today to discuss our approach to third-party risk management and how your bank or other financial sector business can benefit from our TPRM solutions.