How to Become a Trusted Partner of a Bank, Part 2: A Proactive Approach by Third Parties to Risk Management

by Joan McGowan, February 27, 2017
Industry Trends
Global

Abstract

The risk of doing business with a third party is real; the consequences of a risk event are not only disruptive, but often result in long-term reputational damage that can seriously affect the bottom lines of both the bank and the third party. Suppliers that can make third party risk management (TPRM) easier for banks by being proactive, transparent, and helpful will distinguish themselves in an ever-more competitive environment.

NEW YORK -- Celent has released a new report titled How to Become a Trusted Partner of a Bank. The report was written by Joan McGowan, a Senior Analyst in Celent's Banking practice.

It is no longer sufficient for a third party to rely on its reputation. To become a trusted partner of a bank, third parties must demonstrate that they are compliant with the bank’s TPRM throughout the RFP, due diligence, onboarding processes, and lifecycle of the engagement. When a risk event does occur, third parties must be willing to share responsibility.

With finite resources and budget, banks will focus time and effort on third parties that carry the greatest inherent risk to the bank. Providing the bank with a clear picture of those risks will also aid the bank in plugging any gaps in its risk practices.

The RFP process is important in providing insight into how well a third party will perform in light of a risk event. A good RFP will clearly communicate risk control requirements so that the third party can respond in a way that shows alignment with the bank’s risk rankings and control procedures.

Negotiating a contract can be contentious. As a bank’s TPRM practices mature, they will enforce a new level of discipline and quantification. They will begin to incorporate metrics and KPIs in their operational risk dashboards and Risk Appetite statements. With this knowledge, banks will be able to determine third party indemnification provisions and allocation of liabilities at the contract stage. Third parties will be at a disadvantage if they do not have a way to measure and verify the scope of a potential risk event.

“The risk of doing business with a third party is real; the consequences of a risk event are not only disruptive, but often result in long-term reputational damage that can seriously affect the bottom lines of both the bank and the third party,” McGowan said.

“When it comes time to choose a partner, banks will favor those who help them execute their TPRM responsibilities over those who begrudgingly comply,” she added.

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned operating unit of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

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Michele Pace
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Europe (London)
Chris Williams
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Table of Contents

Executive Summary

1

 

Key Research Questions

1

Introduction

2

The Cost of Security to Banks and Third Parties

3

Risks Posed by Third Parties Are No Different from a Bank’s Internal Risks

5

The Role Third Parties Play in TPRM

8

 

Stage 1: Identification and Selection

8

 

Stage 2: Due Diligence and Onboarding

10

 

Stage 3: Negotiating Contracts

13

 

Stage 4: Ongoing Monitoring

14

 

Stage 5: Termination

14

Recommendations for Third Parties

16

Leveraging Celent’s Expertise

17

 

Support for Financial Institutions

17

 

Support for Vendors

17

Related Celent Research

18

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