Best Practices for Vendor Risk Management in Banking
Every single day, customers all over the world rely on banks and the financial sector to complete daily transactions that keep our lives moving. But we’re no longer in the days of cash in bank vaults, and the threats facing banks no longer look like Bonnie and Clyde.
Today, the biggest threats facing financial institutions are cyber-based. Not just that, but a cyberattack could disrupt the entire financial system. And these days, the financial sector is no longer comprised of independent banks contained within their own four walls. These days, the bank sector depends on third-party partners to provide essential services.
This means that risk management for banks is more important than ever before. Here’s a look at what risk management in the financial sector looks like–and best practices so that your institution can protect itself against potential threats.
The Current Landscape of Risk Management and Financial Institutions
One way or another, banks and financial institutions can no longer afford to sidestep risk management.
For new banks, for example, strong risk management is what differentiates them from the herd. This is all about consumer confidence. Bank customers understand that their bank has some of their most sensitive information as well as their money. And if they’re not confident in their bank’s ability to protect them, the bank’s reputation (and customer retention) will suffer for it.
The good news is that the financial sector has made radical shifts in risk management in the last decade. These happened in response to trends that are likely to hold strong, like increased banking regulation (especially in connection to risk management and cybersecurity), heightened customer expectations, and rapidly evolving technology and analytics to meet regulatory and customer expectations.
Mistakes in Risk Management in Banking Sector
Unfortunately, the banking sector still has a lot to learn about risk management. In fact, we still see many of the same mistakes repeated across financial institutions.
For example, one of the most common mistakes we see in risk management programs is a lack of an established outsourcing policy. In other words, you’re bringing in third-party partners without setting any expectations for how they’re selected or security standards they have to maintain in order to continue doing business with you.
Hand-in-hand with a lack of an established policy is an overall lack of oversight. This is common among financial institutions where there is not a full-time risk management team. However, even if you have an established risk management team, you may still lack oversight because your executive board doesn’t understand risk management.
Oh, and if you don’t have an established risk management team, chances are that you’re conducting due diligence and annual reviews with employees who don’t know anything about risk management.
Best Practices for Risk Management in Financial Institutions
It’s time for banking sector risk management to step up. You (and your customers) can’t afford anything less. The problem is that in-house cybersecurity is no longer enough. Your risk management program has to deal with all of the third-party vendors who introduce weaknesses to your network.
With that in mind, here are a few essential best practices for risk management in financial institutions.
Finesse Your Risk Management Program
The first order of business: finesse your risk management program.
If you don’t already have a comprehensive third-party vendor risk management program, now is the time to build one. If you already have one, comb it over to make sure that it’s doing enough.
Bring in a risk management consultant if you have to. It’s easy to settle into the good enough mentality, especially when you have other tasks to worry about. Your customers won’t settle for good enough.
If you’re not sure where to begin, turn your attention to regulatory standards that apply to you. NIST, for example, offers a comprehensive risk management framework that’s free to access. Don’t be afraid to pull your framework straight from regulatory language if you have to–this ensures compliance. However, if you do this, be careful to update your guidelines in keeping with changing regulations.
Do Your Due Diligence
Now comes the other side of the equation: your vendors. Before they ever appear on the scene or access your data, thorough due diligence is non-negotiable.
If you haven’t hired a vendor yet, due diligence is the process of investigating their cybersecurity and risk management policies to ensure regulatory compliance and a good fit for your organizational policies. If you’ve already hired a vendor, due diligence is a routine process where you verify that the vendor is meeting your expectations.
A good place to start is a vendor risk assessment questionnaire. This one by CISA offers a good framework to build from. If you’ve written your questionnaire correctly, it should provide you with a good idea of the vendor’s risk management landscape. From there, you can probe deeper into the vendor’s security track record and compliance policies.
Maintain Routine Risk Assessments
Your work isn’t done once a vendor meets the initial criteria for partnership. In fact, it’s only just begun.
Once you add a new vendor to your partner list, you have to ensure that they continue to comply with your risk management policy. The best way to do that is through routine risk assessments. For a low-risk vendor (i.e. a vendor with little to no access to critical data), this should happen once per year. The higher the vendor risk, the more frequent the risk assessments should be.
These should be conducted on a regular schedule by someone who knows risk management, who has been trained to perform the assessment, and whose job tasks focus on the assessment as a performance metric. That way, it won’t get tossed between employees and left to roast on the back burner.
Vendor Risk Management Services for the Financial Sector
Vendor risk management for the financial sector is no small undertaking. But it helps to have the right tools. That’s where we come in, with risk management solutions for the financial industry that make it easy to ask the right question to the right vendor at the right moment.
So if you’re ready to invest in risk management success, get in touch today to learn how our solutions can empower your risk management program.