Financial institutions increasingly depend on external partners to enhance operational efficiency, drive innovation, and remain competitive. However, building these new connections without enhanced third-party risk management strategies can introduce systemic vulnerabilities, putting financial firms’ data, customers, and business at risk.
In fact, “35.5% of all data breaches in 2024 originated from third-party compromises, up 6.5% from 2023,” The HIPAA Journal. In banking and insurance sectors, vulnerabilities in third-party networks may account for rising response costs, where remediation costs often exceed internal incident expenses.
Global regulators require financial firms to take greater caution when launching and managing third-party partners as a result. “Engaging a third party does not diminish or remove [an FI’s] responsibility to operate in a safe and sound manner and to comply with applicable legal and regulatory requirements,” the U.S. Federal Reserve describes. Investment firms, asset managers, and similar FIs must develop more comprehensive third-party risk management (TPRM) protocols to meet these requirements and take on emerging challenges in this space.
In this article, we explore the evolving landscape of third-party risk management and its critical role in the financial services sector. Readers will gain practical insights into the challenges, governance models, and step-by-step strategies that can help them strengthen oversight and resilience at their firms as their vendor ecosystems grow.
The Escalating Complexity of Vendor Ecosystems
Collectively, today’s financial institutions engage with thousands of external partners, ranging from global cloud providers to specialized fintech innovators. This interdependence creates complex vulnerabilities that may go beyond those addressed within each individual partnership alone.
“Third-party service relationships often involve indirect reliance on other entities in the third-party service provider’s supply chain… for the delivery of services to financial institutions,” The Financial Stability Board reports. “This indirect reliance should not lessen [their] regulatory responsibilities and accountability.”
In 2024, the finance industry became “the second most attacked industry, trailing only manufacturing,” IBM Institute for Business Value reports, where vulnerabilities from external services accounted for 10% of breaches. Here we take a closer look at how these vulnerabilities take shape, and how regulations are evolving to support FIs’ security.
Regulatory Compliance Dynamics
Global regulators now mandate real-time visibility into subcontractor networks, requiring institutions to monitor fourth- and fifth-party relationships, The Financial Stability Board confirms. Many organizations struggle to meet these requirements due to legacy systems designed for simpler vendor landscapes. Updated supervisory guidelines explicitly hold boards accountable for oversight gaps, requiring detailed reporting on vendor performance metrics and risk mitigation strategies.
Cybersecurity Exposure Points
More and more cybersecurity incidents in financial services stem from compromised third-party access credentials or insufficient vendor security protocols. Advanced threat actors increasingly target vendor networks as entry points, exploiting gaps between an institution’s internal defenses and a vendor’s cybersecurity posture.
In one study, “92 vendors were linked to breaches impacting 227 companies… with the true impact likely extending to more than 700 organizations due to undetected supply chain weaknesses,” Security Info Watch reports. Traditional annual audits fail to address these modern attack vectors—breaches may even remain undetected for extended periods.
Operational Continuity Challenges
Recently, high-profile infrastructure outages have exposed critical weaknesses in vendor redundancy planning. Many institutions discovered that their disaster recovery plans inadequately addressed simultaneous failures across multiple vendors. Post-incident analyses highlighted widespread overreliance on service-level agreements without validating actual failover capabilities through stress testing.
Frameworks for Third-Party Risk Management
Fortunately, there are clear options for financial firms. Financial institutions typically adopt one of three structural models to manage third-party risks, each offering distinct advantages—but also implementation challenges.
Centralized Oversight Model
A centralized oversight model approach establishes uniform controls across all vendor relationships. Larger institutions managing extensive partner networks report measurable reductions in policy violations and a “greater understanding of third-party risks,” as Gartner describes. However, some firms with a centralized oversight model may struggle with flexibility issues, struggling to adapt to new technologies and relationships that require specialized oversight.
Federated Governance Approach
On the other hand, “the adoption of a federated data governance model can unlock significant value, empowering organizations to respond more swiftly to market changes, regulatory requirements, and technological advancements,” Boston Consulting Group describes. This decentralized structure allows business units to tailor third-party risk management protocols while maintaining enterprise-wide standards. Particularly effective for institutions operating across diverse regulatory jurisdictions, the model supports innovation in areas like blockchain integration but risks inconsistent oversight of geographically dispersed operations.
Hybrid Management Framework
Hybrid models combine centralized policy development with localized execution to balance compliance with operational agility. There distinct advantages to a hybrid management framework versus its contributing models; however, firms may face extended implementation timelines due to complex coordination requirements.
A Four-Phase Approach to Evaluating Risk
A strong third-party risk management program relies on having a clear, repeatable process for checking and handling risks at every stage of the vendor relationship. As FIs take on more external partners, they need to move away from one-off reviews and adopt an approach that covers the entire vendor lifecycle. The following phased approach to third-party engagement can help organizations find, sort, monitor, and address third-party risks in the long term.
Phase 1: Pre-Engagement Due Diligence
Institutions must create multilayered screening processes before onboarding vendors. Methods should include:
- validating regulatory certifications across operational jurisdictions
- analyzing audited financial records,
- conducting physical security assessments for technology partners
Advanced screening techniques that use artificial intelligence (AI) can be effective in identifying documentation inconsistencies and potential red flags. “AI can cut through… mountains of unstructured information coming from vendors, suppliers and service providers at different times and in a wide variety of formats… to parse data, compare, correlate and analyze in seconds,” according to Forbes.
Phase 2: Dynamic Risk Categorization
Sophisticated scoring models can now categorize vendors based on financial stability, geopolitical exposure, and historical performance indicators. Automated tiering systems adjust classifications quarterly, enabling institutions to allocate monitoring resources efficiently. Organizations using adaptive tiering frameworks resolve emerging risks faster than those relying on static models.
Phase 3: Continuous Monitoring Systems
Real-time tracking of vendor financial health, cybersecurity postures, and compliance status is essential. Leading institutions integrate application programming interfaces (APIs) with vendor systems to monitor privileged access patterns and infrastructure configurations. Geopolitical risk monitoring tools can track developments affecting vendor operations, while unannounced disaster simulations can test actual response capabilities.
Phase 4: Corrective Action Protocols
Standardized response plans must define escalation paths, remediation timelines, and stakeholder communication strategies. Progressive institutions may include “liquidated damage clauses” in their vendor contracts and maintain prequalified replacement partners for critical functions. Firms can require that post-incident reviews be validated independently, ensuring the third party takes corrective action before the firm restores the partner’s privileges.
What to Consider for Your Strategic Launch
Effective third-party risk management calls for practical integration across technology systems, human expertise, and operational workflows. You should directly address any of the following barriers to implementation to ensure a more sustainable and effective third-party risk management approach.
- Technology integration. While new TPRM tools bring sophisticated capabilities, many institutions struggle to integrate them with legacy systems. Successful implementations require cross-functional collaboration between risk, procurement, and information technology teams to ensure seamless data flows and process alignment.
- Talent development. Specialized training programs can help address skill gaps in vendor risk assessment and monitoring. Certification tracks now cover technical areas like API integration security and geopolitical risk analysis, complementing traditional compliance training.
- Regulatory adaptation. Institutions must establish processes for continuous monitoring of regulatory developments across operational jurisdictions. Firms should choose a framework that ensures they can accommodate evolving supervisory expectations. They may also wish to participate in professional working groups that help them stay abreast of new regulatory changes
- Stakeholder communication: Establishing clear communication channels between procurement, legal, and cybersecurity teams ensures alignment on vendor risk priorities. Regular cross-departmental briefings can bring hidden dependencies to light, helping teams be proactive in mitigating new and future threats.
Future Recommendations for Third-Party Risk Management
As indicated, financial firms can adopt proactive strategies to stay ahead of these new, complex third-party risks. Consider these actionable steps to future-proof your firm’s vendor management practices, ensuring security and compliance while maintaining your operational agility.
- Invest in unified technology platforms. Deploy integrated systems combining vendor risk scoring, continuous monitoring, and incident response capabilities to replace fragmented manual processes. Cloud-native solutions can support the aggregation of data in real time while reducing errors from manual reconciliation.
- Develop adaptive governance models. Create flexible oversight frameworks that maintain core compliance standards while accommodating specialized partnership requirements. For example, establish dedicated review boards for emerging technology vendors requiring tailored evaluation criteria.
- Enhance scenario planning capabilities. Conduct biannual simulations of vendor failure scenarios incorporating cyberattack vectors, geopolitical disruptions, and simultaneous service outages. War-gaming exercises should involve external partners to test collective response protocols and contractual obligations.
- Prioritize mission-critical vendor relationships. Focus monitoring resources on partners handling sensitive data or providing essential services, implementing enhanced due diligence for high-impact relationships. Institutions should adopt risk-adjusted resource allocation models that scale oversight efforts with potential business impact.
Third-Party Risk Management Supports Operational Excellence
The path forward demands balanced investments in technological infrastructure, human capital development, and governance innovation. This calls for sustained executive commitment and cross-departmental collaboration. In these ways, successful third-party risk management contributes to—rather than takes away from—operational excellence in financial services.
Partnering with Option One Technologies
Your organization needs a partner it can trust for greater visibility, resilience, and control against third-party risks. Contact us directly to learn how our tailored solutions can help your firm turn third-party risk management into a strategic advantage.
