A/ Introduction: The invisible risk
In today’s hyper-connected financial ecosystem, banks increasingly rely on third party vendors, Fintechs, cloud providers, data processors, payment processing, and consultants to deliver critical customer services and cybersecurity. While outsourcing boosts agility and innovation, it also introduces complex risks that can threaten the bank’s integrity. For smaller banks, the stakes are even higher as the Regulators are unequivocally emphasizing the need for robust Third-Party Risk Management (TPRM) practices to safeguard the safety, soundness, and compliance of financial institutions, irrespective of their size or operational complexity. This is where TPRM becomes not just a best practice, but a strategic imperative. This article explores the unique challenges faced by smaller banks and offers scalable, practical solutions to strengthen TPRM without overwhelming internal capacity.
B/ The Stakes: Why Third-Party Risk Is Different
Unlike internal risks, third-party risks are inherently harder to control. Vendors may have access to sensitive data, influence critical operations, or even represent the bank in customer-facing roles. A single breach or failure in a vendor’s system can cascade into financial loss, legal exposure, and public backlash for the bank. Considering the rise in cyberattacks targeting supply chains, banks are highly vulnerable through their weakest external link. The business and technological complexity increases the risk spiral.
Key third-party risks include:
- Strategic Risk: This arises from ill-advised business decisions or a failure to align third-party activities with the bank’s strategic objectives.
- Operational Risk: Business disruption caused by a third party
- Transaction Risk: Problems with customer service or product delivery can occur if a third party fails to perform as expected, often due to technological failures or fraud.
- Credit Risk: This is the risk that a third party may be unable to meet its contractual obligations or perform financially as agreed.
- Compliance Risk: Violations of laws, rules, or regulations, or non-compliance with internal policies, are often exacerbated by inadequate oversight of third parties.
- Reputational Risk: Negative public perception can stem directly from a third party’s actions, such as customer dissatisfaction or breaches of ethical standards.
- Cybersecurity Risk: The risk of cyberattacks, data breaches, and security incidents is significantly amplified when third parties handle sensitive financial data.
C/ The Challenge Landscape for Smaller Banks
Smaller institutions face distinct hurdles in managing third-party risk:
- Resource Constraints: Lean staff and limited budget make it difficult to conduct deep due diligence or continuous monitoring.
- Vendor Concentration: A single vendor often supports multiple critical functions, increasing systemic exposure.
- Documentation Gaps: The triple P (Policies, Procedures and Processes) may be informal or outdated, lacking audit-ready rigour.
- Regulatory Pressure: Supervisory expectations are rising by emphasising lifecycle oversight, especially for fintech partnerships.
- Weak Bargaining Power: due to their limited influence in the broader market
But that doesn’t mean they can’t address these challenges and build a strong, scalable TPRM program. Here’s how they can adapt world-class strategies based on a modular approach to fit their size and align with their priorities.
D/ Scalable Solutions:
1. Segment Third Parties by Criticality
Use a simple tiering system:
- Tier 1: Vendors supporting core banking, payments, data, or compliance.
- Tier 2: Non-critical but sensitive services (e.g., HR platforms, marketing).
- Tier 3: Low-risk vendors (e.g., office supplies).
This segmentation helps prioritise due diligence, contract reviews, and monitoring.
2. Adopt a Lifecycle View
Even with limited resources, banks should structure TPRM around five lifecycle stages:
- Planning: Define business need and risk appetite.
- Due Diligence: Use checklists for financial health, cybersecurity posture, and compliance history.
- Contracting: Include termination rights, audit clauses, and data protection terms.
- Ongoing Monitoring: Focus on Tier 1 vendors; use questionnaires and periodic reviews.
- Exit Strategy: Document transition plans and data retrieval protocols.
3. Leverage Shared Resources
- Industry Utilities: Tap into shared due diligence platforms (e.g., TruSight, KY3P portal).
- Peer Collaboration: Form regional alliances to share vendor insights and audit findings.
- Templates & Toolkits: Use regulator-issued guides and checklists to standardise practices.
4. Embed Governance into Culture
- Assign TPRM ownership to a cross-functional committee (risk, compliance, IT).
- Use dashboards to track vendor performance, incidents, and renewal timelines.
- Integrate TPRM into board reporting and strategic planning.
- Ensure that contracts are well drafted and, if possible, reflect your unique situation.
5. Technology Leverage
- Utilising modern, digital risk management solutions
- Quantify risk exposures,
- Allocate efficiently internal resources
6. Training and Education
- Prioritise the education and training of risk management personnel on best practices
- Prefer risk-scoring technology
7. Scalable Solutions
- Focus on solutions that can be scaled to the bank’s size and complexity
- Ensure compliance without overwhelming limited resources.
- Establish robust service level agreements and the strategic use of backup vendors.
This approach balanced rigour with realism, satisfying regulators and protecting the bank’s reputation.
E/ Final Thought: Integrity, Simplicity, and Strategic Clarity TPRM is no longer a peripheral concern. It’s a leadership imperative and a central pillar of banking resilience. For smaller banks, it isn’t about matching the scale of a global institution. It’s about being smart, focused, and proactive. The path forward lies in strategic simplicity that can elevate TPRM from a compliance checkbox to a strategic advantage. With the right mindset and tools, even modest programs can punch above their weight and allow them to play confidently in a complex ecosystem.
Jean Rene’ Ngando Moukala – GRCP
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