TPRM in Banking | Compliance & Supply Chain Risk Management

In our highly connected world, third parties are a necessary part of business. But they can introduce vulnerabilities that lead to digital breaches, supply chain disruptions, and other issues. According to Verizon, 30% of breaches are linked to third parties, and this figure continues to increase annually.

The costs of non-compliance can be high. In July 2023, the Office of the Comptroller of the Currency (OCC) fined American Express $15 million for failing to properly oversee a third-party affiliate.

This guide offers practical solutions for managing third-party risk. Learn the best practices and actionable strategies that will help strengthen your third-party risk management processes and keep your organization compliant, secure, and resilient in today's unpredictable business environment.

What is Third-Party Risk Management (TPRM) in Banking?

TPRM in banking means analyzing and minimizing the risks associated with outsourcing to third-party vendors or service providers. Vendors often handle highly sensitive financial data and can become entry points for cyberattacks or data breaches. Any compromise to customer privacy can lead to severe financial and reputational damage.

Banks are highly regulated by agencies like the OCC (Office of the Comptroller of the Currency), CFPB (Consumer Financial Protection Bureau), and FCC (Federal Communications Commission), so failures in vendor oversight can lead to hefty fines and legal consequences.

Major Risks from Third‑Party Vendors

As third-party relationships become more common, so do the risks they pose to banks and financial institutions. Here are seven common risks introduced by third parties:

Cybersecurity: Deficiencies in a third party’s security controls can cause a bank’s data to be breached, compromised, exposed, or lost. You can mitigate the risks by performing due diligence on vendors before onboarding them and through continuous monitoring
Reputational: This happens when a third party’s actions damage a bank’s reputation. It may be a publicized data breach, a negative public opinion, or a lawsuit. Customers will associate any news about third parties with your bank. Doing your due diligence can help protect your organization’s reputation
Operational: A bank may face disruption from a third party if its internal processes, people, controls, or systems fail or are ineffective. To prevent this, ensure you have legally binding service level agreements (SLAs) and also have a backup vendor
Compliance: A third party’s failure to comply with laws and regulations that govern their products and services may expose a bank to increased risks of non-compliance with consumer protection laws and regulations
Financial risk: This risk directly relates to the financial condition of the third party. A third party’s financial health can negatively impact your bank’s financial position. For example, if they lack funding or resources, they may deliver subpar services and products
Fourth-party exposure: Fourth-parties (your vendor’s vendors) can introduce vulnerabilities that affect your bank’s compliance and security. For example, a security breach or a business continuity issue can directly impact your institution, even if you don't directly engage with them.
Concentration risk: This happens when multiple banks rely on the same third-party service provider for critical operations, such as payment processing or cloud services. If that vendor experiences a cyberattack or a major outage, all dependent banks are affected

The image below summarizes the key third-party risks.

TPRM Regulations and Governance Requirements

These are the major agencies that govern TPRM regulations and standards.

OCC (Office of the Comptroller of the Currency)

The OCC supervises banks and federal savings associations, ensuring that they manage third-party relationships in compliance with all applicable laws. In 2023, together with the FDIC and the Federal Reserve, it issued a guidance that requires banks to govern third-party relationships throughout the entire lifecycle. It covers planning, due diligence, contract negotiation, ongoing monitoring, and termination. Financial institutions must assess the risks posed by each third-party relationship, have contracts that clearly define responsibilities, and maintain documentation for regulatory review.

CFPB (Consumer Financial Protection Bureau)

The CFPB's TPRM requirements focus on consumer protection. Financial institutions must ensure that their service providers comply with all applicable federal consumer financial laws. According to the bureau’s Service Provider Guidance, organizations must conduct due diligence before engaging vendors, include compliance expectations in contracts, and continually monitor vendors’ performance. They are legally responsible for violations committed by their third-party service providers.

FCC (Federal Communications Commission)

While the FCC isn’t a banking regulator like the CFPB and OCC, it has TPRM requirements that focus on national security and supply chain risk management. Financial institutions heavily rely on telecommunications and technology for their operations, and the FCC governs the security and reliability of these critical services.

The FCC also regulates how banks communicate with their customers, such as through robocalls and text messages. Banks that use third-party vendors or automated systems to send promotional messages or account alerts must comply with these rules. Violations can result in fines and potential legal action.

How GRC streamlines multi-regulator compliance

A GRC platform unifies the regulatory requirements of the FCC, CFPB, and OCC. Your bank doesn’t have to manage compliance separately for each regulator as the tool maps their rules into shared policies, controls, and workflows. Your compliance team can easily identify problem areas and ensure that data protection, vendor oversight, and consumer safeguards are consistently applied.

TPRM banking solutions also centralize risk assessment and monitoring activities. Banks can record vendor due diligence results, monitor performance, log incidents, and connect each entry to the relevant requirements. Dashboards and automated alerts ensure issues are addressed quickly, deadlines are met, and audit trails are completed. A GRC platform standardizes processes across all three regulatory areas, improves efficiency, reduces duplication, and makes it easier to prove compliance to regulators.

Best Practices and Risk Mitigation Strategies

Follow these best practices for TPRM in banking to maintain compliance and security.

Perform vendor due diligence

This involves assessing vendor qualifications, conducting background checks, and verifying their documents before partnering with them. Take time to assess a vendor’s ability to fulfill contractual obligations and adhere to strict financial regulations and standards. You can establish specific criteria for choosing vendors, like evaluating their financial stability, checking their regulatory compliance history, and assessing their cybersecurity measures. These are crucial in maintaining the security and integrity of financial operations.

The image below shows the vendor TPRM lifecycle.

Check the contract and SLA design

The contract and Service Level Agreement (SLA) are the cornerstones of effective third-party risk management. The contract establishes the legal framework for the relationship, outlining the scope of work, data ownership, and liability. It should cover the third party’s responsibilities for compliance with banking regulations, data security, and confidentiality. The SLA sets measurable performance standards for the vendor's services, such as metrics for system uptime, response times for support tickets, and incident resolution time. It should also include penalties for failure to meet these standards.

Continuous monitoring

Once your bank establishes a relationship with a vendor, it’s important to continuously monitor them to ensure they meet contractual and regulatory standards. Routinely assess their network, business systems, and service providers. That way, you can detect security, performance, or noncompliance issues early and resolve them. Their security and compliance posture should align with your bank’s overall risk management and regulatory compliance objectives.

Have an incident response plan

An incident response plan outlines the steps to be taken in the event of an incident. It reduces the impact of the incident and ensures swift recovery and business continuity. A well-prepared plan covers specific procedures for containing and mitigating the incident and reporting to regulatory bodies. Update and test your incident response plan regularly to ensure you respond effectively. After an incident, conduct an analysis to improve future response strategies.

Have a business continuity plan

A plan ensures that critical services provided by a third party continue or are quickly restored during a disruption. The vendor and bank should both have business continuity plans that explain how they will continue delivering contracted services during disruptions. They must have documented recovery procedures, backup systems, and communication protocols and test the plans regularly. A business continuity plan shows regulators that your bank is prepared to maintain operations even if a vendor fails.

Adopt a scroll-down risk rating strategy

A scroll-down risk rating is a feature in TPRM and GRC platforms that lets banks view all applicable regulatory or policy requirements for a vendor, then assign a risk rating to each: low, medium, or high. The rating system is based on a vendor’s potential impact of non-compliance and prevents oversight, standardizes risk classification, and creates a documented record of decisions. High-risk vendors and compliance gaps don’t go unnoticed, and regulators and auditors have proof that your bank manages each risk in line with policy.

The Role of AI and Blockchain in TPRM

Financial institutions now use AI, blockchain, and other technologies to transform their TPRM functions. Here’s how they do it.

Blockchain for vendor audit logs

Blockchain creates a tamper-proof record of every transaction with a vendor, which is invaluable for compliance and oversight. The technology records each audit event (due diligence findings, compliance checks, and performance reviews) on a decentralized ledger, providing a verifiable history of vendor oversight activities. Blockchain entries are time-stamped and can’t be altered without leaving a trace. Banks that use this technology can easily prove to regulators that vendor monitoring is consistent and that records aren’t falsified.

AI, ML, and automation in continuous risk assessment and fraud detection

AI analyzes structured and unstructured data from sources like news articles, social media, regulatory filings, and legal documents. It can automatically flag a vendor for review if it detects negative news, providing an early warning that a manual team would likely miss. Real-time monitoring ensures fraud detection happens in real time.

ML algorithms can be trained on what constitutes "normal" vendor behavior and transactions and can quickly flag any activity that deviates from the norm. They can also predict future risks by analyzing historical patterns and identifying patterns that indicate potential problems, such as a key vendor's financial distress. Your bank can take proactive measures to mitigate the risk before a crisis occurs.

Automation powered by AI and machine learning allows banks to detect risks in real time. Your bank doesn’t just react to problems, it predicts and prevents them. It automatically blocks suspicious transactions and sends immediate alerts, preventing financial loss before it occurs.

Strengthen Third-Party Risk Management with ComplyScore®

TPRM in banking is no longer optional; it’s vital for protecting your operations, customers, and reputation. Every vendor relationship carries potential risks, and without a strong TPRM solution, a single vendor mistake can disrupt essential services and trigger costly penalties.

Regulatory agencies like the OCC, CFPB, and FCC expect your bank to identify, assess, and mitigate risks across the entire vendor lifecycle. Falling short can result in costly fines and penalties. Modern threats demand modern solutions, and AI, ML, and automation enable banks to detect risks in real time.

ComplyScore® by Atlas Systems combines these technologies in one platform. It automates vendor monitoring and ensures compliance requirements are met throughout the vendor life cycle.

Don’t wait for a small problem to escalate. Audit your vendor risks today with a powerful governance tool, ComplyScore®.

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Frequently Asked Questions

1. How do banks comply with TPRM regulations?

Banks comply with TPRM regulations by having a structured process to manage vendor relationships. This includes performing due diligence, having a comprehensive contract, continuous monitoring, and terminating vendors who fail to meet requirements.

2. How often should a bank assess and monitor vendors?

Banks should assess high-risk vendors at least quarterly, medium-risk vendors biannually, and low-risk vendors annually. They should also conduct assessments whenever there are major changes to vendors’ services or risk profiles.

3. How does TPRM apply to cloud providers and Fintech partnerships?

Banks should vet the security, compliance, and reliability of their cloud and fintech partners, then monitor them continuously. These vendors must follow the same regulations and standards as the bank, as the bank is accountable for any risks.