July 8, 2024
United States

Securing Banking Sector: Third-Party Risk Management (TPRM) Guide

In today's interconnected financial landscape, banks and financial institutions frequently collaborate with a range of third-party vendors. While these partnerships offer numerous advantages, they also introduce significant data security risks.

According to Verizon’s 2019 Data Breach Investigations Report, the financial sector is among the most targeted, accounting for about 10% of all data breaches across all industries in 2018. This underscores the critical need for robust Third Party Risk Management (TPRM) programs to safeguard sensitive data and maintain operational integrity.

In today's financial landscape, businesses are interconnected, and outsourcing and partnerships are necessary—meaning managing risks associated with third-party vendors is pivotal. Whether you're a small community bank or a multinational financial conglomerate, mastering third-party risk management is vital to safeguarding your institution against the vulnerabilities that third parties can introduce.

Why Do Banks Hire Third-Party Vendors?

The primary motivations for banks to engage third-party vendors extend beyond cost savings. Financial institutions outsource various operational activities, including accounting, appraisals, marketing, and loan servicing. Here are some key benefits of these partnerships:

  1. Increased Flexibility and Scalability: Third-party vendors enable banks to scale operations up or down based on demand without the need for significant capital investment. This flexibility helps banks to adapt quickly to market changes and customer needs.

  1. Cost Reduction: Outsourcing certain functions can be more cost-effective than maintaining them in-house. Vendors can offer specialized services at a lower cost due to economies of scale.
  2. Enhanced Efficiency: Vendors often provide services with a higher level of efficiency and expertise. This allows banks to focus on their core competencies while benefiting from the specialized skills of their partners.

  1. Access to Advanced Technologies: Vendors frequently have access to the latest technologies and innovations. By partnering with them, banks can leverage cutting-edge solutions without having to invest heavily in developing or maintaining these technologies internally.

Data security Risks of Third-Party Services

While third-party collaborations offer substantial benefits, they also pose significant Data security risks. Banks must grant vendors access to sensitive data and critical systems, which can become a substantial vulnerability. Cybercriminals often target subcontractors to infiltrate larger organizations. Here are some notable incidents highlighting these risks:

  • Scottrade Bank (April 2017): A subcontractor inadvertently exposed a database containing personal information of 20,000 customers by uploading it to unprotected cloud storage.

  • UniCredit (July 2017): Hackers used a third-party vendor to attack the Italian bank, leading to the exposure of nearly 400,000 customer loan accounts.

  • European Central Bank (December 2018): Cybercriminals attacked the bank's website hosted by a third-party provider, risking data leaks due to malware injection.

  • Ascension (January 2019): A misconfigured server led to the exposure of over 24 million credit reports containing sensitive customer information.

Key Data security Concerns in Third-Party Relationships

The Data security risks associated with third-party vendors include:

  1. Data Leaks: Third parties handling sensitive financial data can be a weak link if they lack stringent security measures. Data leaks can occur if vendors fail to protect data adequately, leading to exposure of confidential information.

  1. Financial Consequences: A breach involving a third party can result in significant financial losses, including fines, legal fees, and compensation to affected customers. It can also disrupt business operations, leading to lost revenue.

  1. Reputational Damage: Customer trust is paramount in the banking sector. A data breach involving a third-party vendor can severely damage a bank's reputation, leading to a loss of customers and business opportunities.

  1. Compliance Issues: Banks are subject to strict regulatory requirements. A third-party breach can lead to non-compliance with regulations such as GDPR, PCI DSS, and others, resulting in hefty fines and legal repercussions.

  1. Operational Disruptions: Disruptions caused by third-party failures can halt critical banking operations. Ensuring that vendors have robust business continuity plans is essential to minimize operational risks.

  1. Fourth-Party Risks: Vendors often outsource parts of their services to other providers (fourth parties), adding another layer of risk. Banks must ensure that their vendors manage these fourth-party relationships effectively.

Types of Third Party Risk Management (TPRM)

Third-party risks span six key areas:

  1. Data security Risk: The risk of cyberattacks, data breaches, and security incidents. Mitigation involves due diligence before onboarding vendors and continuous monitoring.

  1. Operational Risk: Disruption from a third party can be managed through legally binding service level agreements (SLAs). Having a backup vendor ensures uninterrupted operations.

  1. Legal, Regulatory, and Compliance Risk: The impact on compliance with regulations like GDPR is significant for financial services. Ensuring third parties comply with these regulations is crucial.

  1. Reputational Risk: Negative public opinion due to third-party issues, such as data breaches, can damage a bank's reputation.

  1. Financial Risk: Poor performance by a third party can impact financial success, such as through supply chain disruptions.

  1. Strategic Risk: Vendor failure can jeopardize business objectives.

Compliance and Regulation Requirements

Compliance with laws and regulatory standards are essential inclusions in a financial organization’s Third-Party Risk Management policy. Financial organizations must understand these requirements to mitigate legal risks, avoid hefty penalties, and maintain their reputation in a tightly regulated environment.

Key Regulations

Several important legal frameworks play a key role in third-party risk management in the financial sector. These regulations come with specific requirements and challenges that financial institutions must comply with for effective risk management. Some of the major regulations include:

EU-GDPR and UK-GDPR

The General Data Protection Regulation (EU-GDPR) and its U.K. counterpart (UK-GDPR) set stringent data protection and privacy standards, requiring entities to secure personal data and uphold individuals' rights regarding their data.

PCI DSS

The Payment Card Industry Data Security Standard (PCI DSS) establishes security measures for organizations handling cardholder information, ensuring the protection of payment card data throughout the transaction process.

Building a Robust Third Party Risk Management (TPRM) Program

Implementing a comprehensive TPRM program involves several key stages:

  1. Planning: Develop a detailed plan for managing third-party relationships.
  2. Due Diligence: Ensure third parties have the necessary data security measures and financial stability.
  3. Contract Negotiation: Clearly define responsibilities and rights in contracts.
  4. Monitoring: Continuously monitor third-party activities.
  5. Oversight and Accountability: Ensure senior management oversees risk management effectively.

Best Practices for Effective Third Party Risk Management (TPRM)

To enhance third party risk management (TPRM), banks should:

  1. Appoint Responsible Personnel: Designate individuals or teams to manage third-party data security risks.

  1. Clarify Regulatory Requirements: Understand and communicate the regulatory requirements that apply to both the bank and its vendors.

  1. Outline Possible Risks: Analyze potential data security threats and develop strategies to mitigate them.

  1. Build Vendor Risk Profiles: Assess the risks associated with each vendor based on their access levels and data security practices.
  2. Utilize TPRM Software: Implement tools that offer granular access controls, continuous monitoring, and real-time incident response capabilities.

Risk Assessment and Management

Financial organizations should focus on critical risk assessment and management strategies, including:

  1. Identifying Third-Party Relationships: Accurately identify and understand all third-party relationships, including their criticality and access to sensitive data.
  2. Risk Assessments: Analyze potential risks posed by each third-party entity, considering compliance violations, data security breaches, and operational risks.
  3. Due Diligence: Conduct a comprehensive investigation of third parties before formalizing relationships.
  4. Continuous Monitoring: Regularly review third-party performance and conduct routine audits and assessments.

Mitigate Third-Party Risks with RemoteDesk

Financial organizations looking to secure their assets and protect themselves from third-party risk can benefit from RemoteDesk. Our tool, Enhanced Data Loss Protection  Risk (eDLP), helps financial services information security teams with Vendor Risk Management, regulatory compliance, data leak detection, continuous monitoring, and more. Check out more features below:

  1. Advanced Data Security Measures

Preventing Unauthorized Data Access: Our AI-powered solution actively detects and prevents unauthorized attempts to capture sensitive data from screens, including personal customer information, healthcare and financial details, and proprietary company data.

Fraud Prevention through Continuous Identity Verification: By continuously monitoring and verifying employee identities, our system identifies imposters and unauthorized access attempts, significantly reducing the risk of fraudulent activities.

  1. Compliance and Regulatory Assurance

Ensuring Compliance with Stringent Regulations: Insurance companies must adhere to strict data protection regulations such as GDPR, HIPAA, and PCI DSS. Our solution ensures sensitive information is safeguarded according to these standards, minimizing the risk of non-compliance penalties.

Detailed Audit Trails for Regulatory Reviews: Maintaining comprehensive logs of workspace security incidents and breaches provides a clear audit trail for regulatory reviews and internal audits, ensuring transparency and compliance.

  1. Enhancing Operational Efficiency

Minimizing Disruptions with Continuous Security Measures: Continuous identity verification and unattended laptop detection ensure secure employee workflows, reducing potential downtime from security breaches or investigations.

Secure Remote Work Environments: For remote employees, our solution adds an extra layer of security, safeguarding sensitive data beyond traditional office boundaries.

  1. Building Customer Trust and Satisfaction

Strengthening Customer Confidence: Demonstrating a steadfast commitment to data protection helps insurance companies build and maintain customer trust, crucial for client retention and acquisition.

Mitigating Identity Theft Risks: Protecting customer data from unauthorized access minimizes the risk of identity theft, addressing a significant concern for insurance customers.

  1. Cost Efficiency and Risk Management

Streamlining Security Operations: Automating security measures with AI reduces reliance on manual monitoring, optimizing security protocols and lowering operational costs.

Avoiding Financial Liabilities: By preventing data breaches and ensuring regulatory compliance, our solution helps insurance firms avoid costly fines and legal actions.

  1. Proactive Threat Detection and Management

Real-Time Monitoring and Threat Detection: Our solution offers real-time monitoring and detection of security threats, utilizing webcam video, screen capture, and metadata analysis for thorough threat assessments.

Predictive Security Analytics: Advanced AI analyzes patterns to predict potential security risks, enabling proactive measures to prevent breaches before they occur.

  1. Enhancing Employee Accountability and Productivity

Ensuring Accountability: Continuous monitoring fosters employee accountability, deterring unauthorized activities and promoting a culture of security compliance.

Boosting Operational Efficiency: With AI managing security concerns, employees can focus more on productive tasks, enhancing overall efficiency and performance.

Strengthened Access Control: Implementing two-factor authentication and stringent access controls ensures only authorized personnel access critical assets, further securing sensitive information.

  1. Comprehensive Auditing and Reporting Capabilities

Detailed Productivity Insights: Comprehensive datasets offer valuable insights into user presence, accountability, compliance adherence, and productivity metrics.

In-Depth Session Analysis: Utilize advanced session analysis tools for thorough examination of security incidents and operational performance metrics.

All-in-One Data Protection with RemoteDesk

RemoteDesk provides a unified data security solution tailored for insurance companies, ensuring compliance with multiple regulatory requirements while enhancing corporate security. Experience the benefits firsthand—request a free trial today.

Final Take on Third Party Risk Management (TPRM)

Third-party vendors are essential for the operational efficiency and technological advancement of banks. However, these partnerships also introduce significant data security risks that must be meticulously managed. By implementing a robust Third Party Risk Management (TPRM) program, banks can effectively mitigate these risks, ensuring compliance with regulatory standards and safeguarding their sensitive data.

Adopting comprehensive Third Party Risk Management (TPRM) practices will not only protect banks from potential cyber threats but also enhance their overall security posture, ensuring a trustworthy and resilient financial ecosystem.

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