OCTOBER 9, 2019
Managing Vendor Relationships
By Hilary Collins, Assistant Editor, Financial Managers Society
With technology becoming more and more ubiquitous throughout financial institutions, many banks and credit unions are finding that employing the help of third-party vendors is the most efficient way to provide the services customers want and the technological innovations needed to streamline operations. As institutions increasingly rely on these third-party relationships, however, regulators are becoming more vigilant about the potential risks that come with them. Scott Sargent offers some tips on how to keep your institution safe and compliant:
Perform risk assessments
When evaluating vendors, institutions should consider operational, reputational, compliance, concentration, strategic, legal, financial and credit risks. Also, don’t overlook country risk analysis – while your bank or credit union may not do business outside the country, your vendor might.
Perform due diligence
After analyzing the potential risk landscape, it’s time to turn an appraising eye on the vendor itself. Investigate the firm’s strategies, legal and regulatory compliance, financial condition, reputation, operational capability, fee structures and more. While you may never know enough to completely neutralize risk, the investigation should be thorough enough to convince leadership and regulators that the institution did its homework.
Sign the contract
Once a vendor has been selected, the contract used to forge the relationship requires discipline as well. “The final contract should represent the business terms both parties expect, mitigation of the risks identified in the risk assessment and tools to maintain due diligence and monitor ongoing performance,” Sargent says.
Monitor the relationship
Monitoring vendor relationships should flow naturally out of the previous three steps. Knowing the risks for both the institution and the vendor and having a solid contract should provide the tools to make sure the relationship is successful.
These steps, of course, are just the beginning. But starting things on the right foot is a good step toward building the kind of symbiotic relationship that can ultimately provide a strategic boost for a bank or credit union – and keep the regulators happy as well.