![](/img/client_headers/SpilmanThomas/Header.jpg)
with contributions from Cory Howard, Wake Forest University School of Law 2014L
Are you bored? Is your bank running too smoothly? Do you miss those long, loud and involved conversations with your examiners, superiors or shareholders? If so, then screwing up vendor management may be right for you. Below are five easy steps to making a mess of your vendor management and why doing it will work.
1. JUST DO IT.
Analysis is important. Before undertaking any significant vendor relationship, the Bank's Board of Directors or Senior Management should analyze all aspects of it carefully. Risks are ubiquitous in vendor relationships. The risks of each proposed transaction are unique to that transaction but there are some universal risks:
-
Strategic Risks. Does it make sense according to the bank's business plan? Will it provide an adequate rate of return to the bank?
-
Reputational Risks. How bad a black eye will the bank get in the court of public opinion if this goes bad?
-
Operational Risks. Can the bank internally manage and supervise this vendor relationship?
-
Transaction Risks. What will happen if there is a problem with the service or its delivery?
-
Credit Risks. What is the level of risks that the vendor will not be able to meet its obligations?
-
Compliance Risks. What risks does the bank face if the vendor violates regulations or deviates from the bank's business standards?
All are important. Each should be weighed.
Any analysis of the “risks versus rewards” of the proposed arrangement should take a long term perspective. Furthermore, it should not focus solely on costs, especially short term savings, but should also address talent retention, expertise and risk mitigation. Finally, the bank should confirm prior to entering into such an arrangement, that it is consistent with the bank's strategic planning, its overall business strategy and that these services are best outsourced and not done in-house.
2. PICK THE VENDOR AT RANDOM FROM AN AD ON THE INTERNET.
Know your business partners. Once the bank has determined to proceed with outsourcing the service, then the right partner should be chosen. To find it, the bank should conduct due diligence of any potential partner – do not just rely on personal knowledge with any potential vendor. Due diligence involves a review of all available information about a potential third party, focusing on the entity's financial condition, its specific relevant experience, its knowledge of applicable laws and regulations, its reputation and the scope and effectiveness of its operations and controls. (FDIC FIL 44-2008a) To accomplish this effectively, it is advisable (among other things) to audit the vendor’s financial statements and annual reports, to review of its internal manuals and procedures, to investigate the existence of significant litigation or regulatory complaints, to determine if it will use third parties, to understand their data security, privacy protections, and business resumption strategy, and understand its knowledge and ability to comply with relevant federal civil rights and consumer protection laws and regulations. Thankfully, since due diligence is so time consuming, the level of the review need only be commensurate with the importance and magnitude of the relationship to the bank.
3. MAKE AN ORAL AGREEMENT WITH YOUR VENDOR.
Any vendor agreement should be spelled out clearly in a written agreement signed by all parties prior to the relationship's start. Depending on the significance of this arrangement, it should be reviewed by knowledgeable counsel and be approved by the bank’s Board.
The length and terms of contract will vary by the type of relationship and the scope of risks associated with it. But, and at a minimum, the contract should clearly set forth the rights, expectations and obligations of each party, require the vendor to comply with all relevant regulatory and legal responsibilities (including provisions if they violate compliance related obligations, including UDAAP), authorize the bank to monitor and audit the vendor, detail the compensation paid to the vendor (be wary about incentivizing your vendors to steer consumers to higher cost products), strict confidentiality standards, data rights, and security requirements, handling of customer complaints, terms of default and indemnification. Do not rely on informal understandings to supplement the written contract but make sure everything is unambiguous and detailed.
4. ONCE THE WORK IS OUTSOURCED, IT SHOULD BECOME OUT OF SIGHT, OUT OF MIND.
Trust but verify. The bank should dedicate sufficient staff and resources to monitor the vendor relationship throughout its term. However, what that means will vary according to that relationship's level of importance to the bank. It is not "one size fits all.”
Ongoing supervision is important because a bank bears ultimate liability to conduct banking and related activities in a safe and sound matter. A contract cannot shift that responsibility if there are violations of consumer protection laws, or other federal law and regulations. It is the bank (and not the vendor) that will be held responsible by the FDIC, CFPB, OCC, and other federal or state regulators. Therefore a bank should not believe that a contract (even with indemnification provisions) will protect it from liability.
This vigilance means ongoing due diligence. Among other things (many areas of focus have been previously discussed), it will be necessary to review reports to confirm the vendor's compliance and proper performance under the contract, and to review customer complaints about the vendor and how those complaints were resolved. The CFPB stresses that vendors must comply with federal consumer protection laws. Vendor relationships cannot present unwarranted risks to consumers. If any such problems are issues are found during ongoing supervision, then prompt and proper steps must be made.
5. VENDOR MANAGEMENT IS SOMEONE ELSE'S PROBLEM.
Vendor management is under the microscope; hefty fines are oftentimes levied for violations. Responsibility for compliance is shared by bank employee, senior management and the board. Therefore, the bank should not look at vendor management as if each relationship exists in its own silo. The bank should take a more comprehensive view of vendor management by analyzing all third-party relationships together. All of the vendor relationships should be examined as a unit so the bank can assess risks that may arise from their totality. Otherwise, in assessing vendor risks, the bank may "miss the forest for the trees."
Final words of wisdom: this level of excitement (i.e. messing up vendor management) may not be for everyone. On second thought, it is probably for no one. So maybe just stick to a weekend trip to Vegas with your friends (and keep properly managing those vendors).