2024 Third-Party Vendor Risk Management in the Financial Industry

Due to their extensive reliance on third-party vendors, financial institutions face heightened cyber risks in 2024. These vendors are integral to their operations but can also become potential cybersecurity weak points. The growing dependency on these vendor relationships  necessitates robust third-party vendor risk management for financial institutions. Effective TPRM programs are pivotal in pinpointing and mitigating cyber risks, thus strengthening the overall security posture of these financial organizations.

This aspect of cybersecurity is particularly crucial for financial institutions, as they not only need to safeguard their internal operations but also ensure the security of sensitive customer data. Establishing a comprehensive vendor risk management process enables  these institutions to maintain a resilient security posture against evolving cyber threats while addressing regulatory requirements.

In this discussion, we will delve into key factors that financial institutions should consider when developing their TPRM strategies. These considerations are vital for maintaining the integrity of their cybersecurity infrastructure and ensuring the trust of their clients in a digitally interconnected financial landscape.

Common third-party risk management program weaknesses

In evaluating third-party risk management programs, financial institutions often encounter several critical weaknesses that can significantly undermine their effectiveness. These vulnerabilities, if unaddressed, can leave institutions exposed to heightened cyber risks, operational risks, financial risks, and increased compliance risks. Key weaknesses typically observed in vendor risk management programs include:

• Insufficient board oversight: Often, there is a lack of active engagement or oversight from the institution’s board of directors. This oversight is crucial for ensuring that vendor risk management aligns with the broader strategic objectives and risk appetite of the institution.
• Undefined outsourcing policies: Many institutions lack a well-defined outsourcing policy. Such policies are essential for setting clear expectations and guidelines for engaging and managing potential vendors.
• Vague contractual agreements: Contracts with vendors often lack detailed stipulations regarding security practices and procedures for risk response. Specificity in contracts is vital for establishing clear responsibilities and expectations in addressing operational risk.
• Inexperienced review personnel: Vendor performance reviews are sometimes conducted by personnel who may not have sufficient expertise in risk management, leading to inadequate assessments of vendor capabilities and risks.
• Inadequate disaster recovery testing: The absence of regular, comprehensive disaster recovery testing between the vendor and the financial institution can leave untested vulnerabilities.
• Neglected review of vendor security processes: Often, financial institutions do not thoroughly review or monitor their third-party vendors’ information security and cybersecurity processes. Regular reviews and ongoing monitoring are essential to ensure that vendors maintain high security standards and adapt to emerging cyber threats.

Addressing these weaknesses is critical for financial institutions to bolster their cybersecurity defenses and maintain a robust security posture. By rectifying these gaps, institutions can not only enhance their operational resilience but also uphold the trust and confidence of their customers and stakeholders in an increasingly digitized financial landscape.

5 TPRM considerations for financial services

Beyond improving threat detection, an effective third-party vendor risk management process allows financial institutions to continuously assess the cyber health of their third-party vendors and ensure alignment with regulatory compliance.

Below are five considerations for effective third-party vendor risk management at your financial institution:

1. Vendor due diligence.

Vendor due diligence is a crucial aspect of third-party risk management, involving the thorough assessment of a vendor’s security infrastructure and practices. To ensure effectiveness, this due diligence must be an ongoing process, adapting to new threats and vulnerabilities as they emerge. Financial institutions typically utilize detailed third-party questionnaires as a key tool in this process. These questionnaires are designed to extract comprehensive information about the vendor’s security measures, practices, and protocols.

The depth and breadth of these questionnaires are critical; they should cover a wide range of security aspects including data protection, access controls, and incident response capabilities. Effective vendor due diligence also involves verifying the information provided in the questionnaires, possibly through audits or independent assessments. This thorough examination allows financial institutions to identify potential risks and weaknesses in their vendors’ cybersecurity defenses.

The goal of vendor due diligence is not only to assess current security standards but also to evaluate the vendor’s ability to evolve and strengthen their security posture over time. Regular updates to the due diligence process, including the questionnaires, are essential to reflect the rapidly changing cybersecurity landscape. This proactive approach ensures that financial institutions can anticipate and mitigate risks posed by their third-party vendors, thereby safeguarding their own systems and data against potential breaches.

2. Regular risk assessments

Conducting regular cybersecurity risk assessments is an essential component of effective vendor risk management programs for financial institutions. These assessments are integral in pinpointing specific vendor cyber risks that could significantly impact the organization’s security posture and compliance risk. Identifying high-risk vendors enables a focused approach, allowing institutions to collaborate closely with these vendors to mitigate identified threats.

These cybersecurity risk assessments should include a comprehensive evaluation of the vendor’s security protocols, data handling procedures, and incident response strategies. By understanding the nuances of each vendor’s cybersecurity landscape, financial institutions can better anticipate and address potential vulnerabilities. The outcome of these assessments aids in categorizing vendors based on the level of risk they pose, which is crucial for prioritizing and efficiently allocating resources.

Additionally, regular assessments help in tracking improvements or deteriorations in vendor security practices over time. This dynamic approach ensures that financial institutions stay ahead of evolving threats and adapt their strategies accordingly. By maintaining a vigilant and structured process for evaluating vendor cyber risks, financial institutions can significantly enhance their overall cybersecurity resilience, effectively safeguarding their critical assets and customer data from potential breaches.

3. Adherence to strict regulatory guidelines

In the highly regulated financial services industry, vendor compliance is not just a best practice but a necessity. Ensuring that third-party vendors adhere to stringent regulatory requirements is crucial, as non-compliance can lead to significant financial penalties and reputational damage. To safeguard against these risks, financial institutions must establish clear compliance risk guidelines for their vendors, outlining the regulatory standards and expectations in detail.

It is essential to implement processes for continuous compliance monitoring. This proactive approach involves regularly reviewing and evaluating vendor practices to ensure they remain compliant with evolving regulations. Continuous compliance helps in identifying potential issues early, allowing for timely corrective actions and reducing the risk of regulatory infractions.

To enhance these efforts, financial institutions should also consider leveraging automated tools and technologies that facilitate ongoing compliance checks. These tools can efficiently track vendor compliance, alerting the institution to any deviations from the set regulatory standards. By prioritizing vendor compliance and establishing robust mechanisms for continuous monitoring, financial institutions can maintain a high level of regulatory adherence, thereby mitigating legal risks and upholding their reputation in the industry.

4. Contracts and service-level agreements

Establishing vendor responsibilities for meeting specific cybersecurity standards is a critical aspect of third-party contracts in today’s digital business environments. In drafting these contracts, it is essential to include performance KPIs that provide a clear framework for evaluating third-party security measures in alignment with your organizational cybersecurity goals. These KPIs serve as quantifiable metrics that can objectively assess vendor performance and compliance with established cybersecurity requirements.

In addition to performance KPIs, contracts should also define service-level agreements (SLAs) that detail the expected quality and timelines for vendor services, especially those related to cybersecurity. These agreements should cover aspects such as response times for addressing security incidents, data protection standards, and regular security audits. By explicitly outlining these requirements, financial institutions can hold vendors accountable for maintaining high cybersecurity standards, reducing the likelihood of breaches and other security incidents.

The contracts should also include provisions for regular reviews and updates to ensure that they remain relevant and effective in addressing evolving cybersecurity challenges. This approach fosters an environment of continuous improvement and adaptation, crucial in the fast-paced world of digital security. By prioritizing clear, detailed contracts and SLAs, financial institutions can establish business relationships with vendors that are grounded in transparency, accountability, and mutual trust, effectively minimizing cybersecurity risks and enhancing overall security posture.

5. Business continuity and response planning

Understanding and integrating your vendors’ business continuity and disaster recovery plans is an essential part of vendor risk management. It’s crucial to evaluate not only the protocols vendors have in place for their disaster recovery and business continuity plans but also to ensure these plans are consistent with your organization’s cybersecurity policies. This alignment is key to maintaining seamless operations and security during unforeseen disruptions.

Discussing and aligning business continuity and disaster recovery requirements with your vendors is necessary for creating a cohesive response strategy. This ensures that vendors can make necessary adjustments to their plans, aligning them with your organization’s specific needs and risk profiles. Such collaboration is essential for crafting an effective and unified approach to handling crises and ensuring business continuity.

Moreover, integrating vendors’ business continuity plans into your organization’s overall plan is beneficial. This integration helps in streamlining the review and implementation process and enhances the overall effectiveness of the plans. It ensures that each vendor’s roles and responsibilities in the event of a disruption are clear and well-understood, minimizing confusion and delays in response. By effectively coordinating business continuity efforts with vendors, financial institutions can create a more resilient and responsive framework that is better equipped to handle emergencies, thereby safeguarding critical operations and sensitive data.

Protecting against financial and reputational risk with help from SecurityScorecard

For financial institutions to effectively monitor cyber risk, they must be able to continuously assess the cyber health of their vendors. With SecurityScorecard’s financial services solutions, organizations can proactively manage third-party risk. Our cybersecurity solutions help you gain an outside-in view of your vendor ecosystem so you can quickly and easily identify and address cyber risks.

By assigning a letter grade to each vendor, SecurityScorecard’s third-party risk management solutions help you accurately evaluate vendor security, and assess the risk they pose to your business. This allows you to map vendor vulnerabilities to security standards within the financial industry so you can ensure overall security and compliance.

As more financial services firms rely on third-party vendors to conduct daily operations, being able to actively address vendor cyber risk is crucial. With SecurityScorecard you can optimize your risk management processes while strengthening vendor relationships.