Ballard Spahr has analyzed a report from the Office of the Comptroller of the Currency that spotlighted the additional risks from financial institutions expanding their use of third-party vendors.
The report was part of the OCC’s Semiannual Risk Assessment for Fall 2017.
There are operational and compliance risks associated with banks using third-party service providers, which can include collection agencies. The OCC report specifically mentioned merchant card processing as a particular point of concern, saying that the service providers ““can create concentrated points of failure resulting in systemic risk to the financial sector that banks can address through appropriate due diligence and oversight.”
As banks seek out companies to provide new products or services or to replace products or services currently offered by a financial institution, those companies need to do a better job of monitoring and overseeing their relationships. Consolidation is only exacerbating that problem, the OCC said.
Many banks have become increasingly reliant on third-party service providers to support their key operations. Consolidation has increased among significant service providers, as has consolidation in the financial services industry. This consolidation of service providers has increased reliance on a smaller group of third parties providing critical applications and resulted in large numbers of banks, especially community banks, relying on a small number of service providers.
