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Table of Content

Types of third-party risk

Regulatory or compliance risk

Security risk

Reputational risk

Operational risk

Strategic risk

Financial risk

Fourth-party risk

How to minimise third-party risk

Implementing third-party due diligence

Segmenting vendors according to risk and authorisation levels

Using third-party tools and frameworks

How Atfinity minimises risk

Conclusion

ARTICLE

Third-Party Risk Management: What Banks Need to Know

In a poll of 240 of Europe’s largest financial institutions, 78% stated to have experienced a third-party data breach in the past year. With this being only one form of risk associated with third parties, it’s clear to see why third-party risk management is increasingly important.

Therefore, in this article we will discuss:

The different types of third-party risk and how they can manifest
What banks can do to minimise third-party risk
How Atfinity minimises risk

Featured image for third party risk management with Alexander Balzer

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Types of third-party risk

You can broadly differentiate between six types of third-party risk based on which aspects of your business they can impact. All of these risk types also apply to fourth-party risk, which I will discuss a bit later on.

Regulatory or compliance risk

Through regulations such as DORA in the EU, financial institutions are required to track risk associated with third parties. On top of that, third-parties are also required to follow all laws and regulations in their given jurisdictions. Their inability or unwillingness to do so can then be applied to the parent organisation as well.

For example, if a bank funnels customer data through a third party that is non-compliant with the General Data Protection Regulation, the bank is at risk of non-compliance as well as the third party.

Security risk

As previously mentioned, data breaches are especially dangerous when it comes to third-party risk. For example, hackers obtained a copy of all system data from WorldCheck by targeting one of their partners. So, even though WorldCheck itself had the proper security measures in place, their customer data was still exposed due to a third-party vulnerability.

Therefore, ensuring that all third parties, especially those that handle sensitive data, have solid security measures in place is essential. This is usually done by comparing their security system to an approved security framework, which I will touch on later on.

Reputational risk

Third parties can also cause damage to a bank’s public image via association. Namely, if a third party is found to have broken a law, misinformed its customers, or otherwise has not upheld the same values as the bank they’re associated with, both parties may suffer in terms of public opinion.

This could then lead to a loss of customers, less effective marketing campaigns, a drop in perceived value, and so on.

Operational risk

In the absence of redundant or backup systems, a third party may also cause damage to its partners by breaking its operational chain. For example, if a bank entrusts a third party to handle its KYC in its entirety, if said third party were to become non-operational, the bank could not properly perform KYC and thus could not onboard new clients or perform client remediation.

The potential damage can also be more long-lasting. For example, if a third party permanently loses the bank’s customer data. For this reason, many third parties are required to have backups of key data.

Strategic risk

Since it’s common for third-party vendors to have more than one client, it’s also possible for there to be a misalignment between their and the bank’s strategic goals. For example, if the bank in question starts putting a heavy emphasis on green initiatives while the third-party operates contrary to said actions, a misalignment can form.

While this type of risk isn’t as immediately impactful as the others, it can harm the longevity of that arrangement.

Financial risk

Similarly to operational risks, the financial health of third-party vendors also affects their clients. At worst, the third party could simply cease operations, potentially leaving the bank with an incomplete system.

However, more mild situations can be damaging as well. For example, if the third-party vendor can no longer afford to employ a well-trained staff, their processes might suffer in terms of performance, which in turn will affect the bank they’re working with.

Fourth-party risk

Fourth-party risk refers to all of the risk types we’ve mentioned but from the perspective of the third-party vendor. In other words, the risks associated with third-party vendors that also outsource some of their key processes.

And while fourth-party risk can be difficult to track due to the complex chain of dependencies involved, it’s worth keeping in mind when looking at third-party vendors. For example, a third-party vendor that handles all of their processes in-house can be seen as a lesser risk than a vendor that outsources multiple key processes.

How to minimise third-party risk

While it’s impossible to completely eliminate risk, for third-party vendors and otherwise, there are actionable steps that banks can take to minimise third-party risk.

Implementing third-party due diligence

In order to avoid third-party risk, banks need to be well-armed with information about the vendors they’re in business with. Namely, prior to entering an arrangement, a bank must perform its due diligence. This includes performing a background check, seeing whether proper security measures and controls are in place, assessing their financial status and strategic goals, and so on.

Furthermore, just like with KYC or KYB, the bank must continue monitoring the associated vendors on a regular basis. The general rule of thumb here being that those vendors who can cause the most substantial harm to the bank and/or are the most likely to become a risk should be monitored more closely and regularly.

Segmenting vendors according to risk and authorisation levels

It’s not uncommon for larger banks to have hundreds or even a thousand different third-party vendors as part of their system. This makes it difficult to keep track of which vendors have access to important data.

Therefore, it’s advised to group vendors according to a few criteria. For example, which vendors have access to valuable data. Said group can then further be segmented according to their risk level or operational importance to maintain an adequate level of monitoring.

Furthermore, segmenting the vendors in your system can also ensure that no party has access to data they do not need to operate. As we’ve mentioned, this is to lower the odds of a data breach, as they can be incredibly damaging.

Using third-party tools and frameworks

Third-party risk assessments can require a significant amount of resources, which may deter some banks from properly going through the process. However, there are both tools and frameworks that can be used to more easily minimise risk.

In regards to tools, there is third-party risk assessment management software that will use public datasets to scan and keep track of third-party vendors and their potential risk levels.

Frameworks on the other hand guarantee a certain level of security so that banks can more quickly perform their due diligence checks. For example, if a third-party vendor has an ISO certification, a bank will know straight away that the vendor has security controls in place.

How Atfinity minimises risk

Lastly, since I’ve mostly focused on the point of view of a bank so far, I’d like to give another perspective – that of the third party vendor.

As Atfinity works with many different banks, ensuring that we aren’t a high risk factor is essential. Therefore, we ensured that Atfinity’s security is top-notch.

To showcase this feat, we received an ISO27001 certification. This certification also shows our commitment to confidentiality and the utilisation of security best practices. Furthermore, we’ve formed strategic partnerships with security firms to prevent cyberattack and similar threats.

We also advise our clients on how to keep their valuable data safe. For example, for banks that don’t have a dedicated IT team, we always recommend utilising our Atfinity Cloud so that our engineers can ensure the cloud infrastructure is up to date and secure.

Those are just some of the measures we take to minimise our risk. If you would like to know more about Atfinity and why we’re a safe third-party vendor for banks of all sizes, get in touch with us by clicking the button below.

Conclusion

In conclusion, properly assessing third-party risk is essential for minimising compliance, security, reputational, operational, strategic and financial risk. Banks must perform due diligence when deciding which third-party vendors they will use, especially if they have access to important data and continuously monitor their risk profile.

To these ends, a bank can lean on third-party risk management tools or well-established security frameworks, such as the ISO framework.

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