Mandating direct deposit employees
Failure to manage these risks can expose an institution to regulatory action, financial loss, litigation and reputation damage, and may even impair the institution's ability to establish new or service existing customer relationships.
Not all of the following risks will be applicable to every third-party relationship; however, complex or significant arrangements may have definable risks in most areas.
There are numerous risks that may arise from a financial institution's use of third parties.A third-party relationship should be considered significant if the institution's relationship with the third party is a new relationship or involves implementing new bank activities; the relationship has a material effect on the institution's revenues or expenses; the third party performs critical functions; the third party stores, accesses, transmits, or performs transactions on sensitive customer information; the third party markets bank products or services; the third party provides a product or performs a service involving subprime lending or card payment transactions; or the third party poses risks that could significantly affect earnings or capital.The FDIC reviews a financial institution's risk management program and the overall effect of its third-party relationships as a component of its normal examination process.Also, any negative publicity involving the third party, whether or not the publicity is related to the institution's use of the third party, could result in reputation risk. Operational risk is the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events.Third-party relationships often integrate the internal processes of other organizations with the bank's processes and can increase the overall operational complexity. Transaction risk is the risk arising from problems with service or product delivery.
As the financial services industry continues to evolve, some financial institutions are also using third parties for functions that are either new or have traditionally been performed in-house.