The Banking & Capital Markets industry is fast changing. The old concept of managing risks through internal operations alone is becoming anachronistic. Core services like payment processing, regulatory reporting, cybersecurity, and cloud-based infrastructure have been outsourced to third-party vendors. In such a scenario, financial institutions require these relationships for innovation and efficiency but open the door to many risks.
What is Third-Party Risk Management (TPRM)?
TPRM means risk identification, evaluation, and management that derive from third-party vendors, service providers, or partners. Third parties for the banks and the financial institutes need to satisfy requirements that match standards set out in regulations by governments, are maintaining high-level security for the bank’s data, and align to risk appetite defined in the company’s risk culture.
Third party services in Banking & Capital Markets encompass:
- Third Party Vendors used in Banks/Financial In the Banking & Capital Markets
- KYC and AML solution providers
- Not dealing with third-party risks might cause penalties in regulatory, financial, and reputational losses.
Why Banks & Capital Markets Companies Require TPRM
Banks & capital markets organizations are heavily regulated and have highly sensitive customer data. Engagement of third-party vendors introduces unique sets of risks to the organizations that include:
- Data Security Risks
Banks & capital markets institutions handle confidential customer information comprising personally identifiable information (PII), account-related information, as well as transaction details. Third party vendors like cloud providers or the KYC platform often access the data.
This could lead to severe financial damages, penalties and fines by law, and destruction of the consumer’s trust for that particular firm.
For example: A hacker breaks into your third-party payment service provider’s portal and fetches the customer payment details. It is your responsibility to ensure your bank enforces proper security with such vendors.
- Regulatory Risk
The regulations that the institution has to adapt to include those of the global system, such as:
- GDPR
- CCPA
- Basel III
- AML guidelines
- KYC
If such a third party fails to uphold these regulations your institution will then be held accountable. This exposes your institution to fines, possible legal action against it, as well as ruining its reputation in the market.
Example: Your KYC solution provider is not keeping up with the latest AML regulations, creating holes in your compliance framework. Regulators will hold your institution accountable.
- Operational Risks
Third-party vendors handle mission-critical functionalities, including but not limited to payment processing and trading platforms and customer onboarding systems. Vendor downtime or other operational failures have the potential to disrupt your business, negatively affecting customer experience as well as your financial performance.
For example, a cloud service provider has an outage, which means your online banking services go down. This leads to dissatisfied customers, lost revenue, and reputational damage.
- Reputational Risks
Such malpractices or lawsuits against third-party vendors can harm the brand reputation of your institution. The customer and investor can also raise questions over your due diligence process and risk management framework.
Example: A RegTech vendor is convicted of fraudulent practices. Your firm’s relationship with the vendor calls into question your selection process for third-party vendors.
Develop a vendor inventory and classify vendors based on their risk level:
- High-Risk Vendors
(e.g., Payment processors, KYC/AML solution providers)
Require stringent assessments and continuous monitoring. - Medium-Risk Vendors
(e.g., IT support, cloud service providers)
Require periodic risk assessments. - Low-Risk Vendors
(e.g., Office supply firms)
Require basic due diligence.
How to Implement Third-Party Risk Management in Banking & Capital Markets
A TPRM program is a strategic effort that incorporates many critical steps:
Step 1: Identify and Categorize Vendors
Create an inventory of vendors and classify them into three risk categories:
- High-Risk Vendor
payment processors, KYC/AML solution providers
assessed with high stringency and monitored continuously - Medium-Risk Vendor
IT support, cloud service providers
risk assessment need be performed periodically - Low-Risk Vendor
office supply firms
require basic due diligence.
Step 2: Vendor Risk Assessment
Evaluate each vendor’s risk profile in the following areas:
- Data security measures
- Compliance with regulations
- Operational soundness
- Financial strength
High-risk vendors will need to undergo audits and must have, at minimum, ISO 27001 or SOC 2 compliance.
Step 3: Monitor Vendors
Periodically review your vendors’ performance and audit them to ensure they still meet your firm’s standards. Be alert to red flags, such as financial instability, legal issues, or changes in ownership.
Step 4: Contracts clearly defined
Include in contracts between vendors:
- Data protection clauses
- Compliance requirements
- Termination clauses (when the vendor is not compliant with standards)
Step 5: Technology Use in TPRM Automation
Make use of TPRM software to automatically analyze vendors, check their performance, and store data. Automating TPRM enhances efficiency while offering real-time visibility of the risks that lie with vendors.
Advantages of TPRM in Banking & Capital Markets Firms
The advantages of a well-designed TPRM framework are many:
✅ Data Security: Protect sensitive customer information from breaches.
✅ Regulatory Compliance: All the vendors should meet the legal and regulatory standards.
✅Operational Continuity: Avoid disruption in services because of third party failures.
✅ Reputation Management: Show the regulators, customers, and investors that your company is serious about risk management.
How We Can Help You
At The Staffed Agency, we specialize in Third-Party Risk Management for Banking & Capital Markets firms. Our services include:
- Risk assessments of third-party vendors
- Compliance audits to ensure regulatory adherence
- Automated risk monitoring to reduce manual effort
- Contract management support to safeguard your business
Don’t let vendor risks threaten your business operations, regulatory standing, or reputation. Let us help you build a robust TPRM framework and secure your firm’s future.
Contact Us Today
Ready to strengthen your Third-Party Risk Management?
Contact The Staffed Agency and let us help you protect your business from vendor-related risks.
Together, we’ll secure your firm’s future in an ever-evolving financial landscape.
