The interconnectedness of the modern financial services ecosystem has created unprecedented opportunities for innovation and efficiency. However, this connectivity and the resulting reliance on external partners have also amplified the complexities and potential vulnerabilities associated with third-party relationships. Financial institutions face a dynamic and increasingly challenging risk landscape, demanding a more sophisticated and proactive approach to Third-Party Risk Management (TPRM).
Risks and Challenges Facing the Financial Services Industry
Reliance on third parties introduces a multitude of risks that can significantly impact financial institutions. Understanding these challenges is the first step towards building a robust TPRM framework.
- Operational Disruptions: Depending on external vendors for critical services — like information technology (IT) infrastructure, data processing, or customer support — exposes institutions to potential disruptions. Outages, system failures, or even the insolvency of a key vendor can lead to significant operational downtime, impacting service delivery and customer trust.
- Data Security and Privacy Concerns: Sharing sensitive customer and internal data with third parties increases the attack surface for cyber threats and the risk of data breaches. Breaches originating from third-party vulnerabilities are a significant concern, contributing to substantial financial impacts on financial institutions. The average cost of a data breach in 2024 was $4.9 million, a 10% increase from the previous year.[1] For the financial services industry, this average cost is even higher, reaching $6.1 million per incident.[2] Regulatory scrutiny around data privacy (e.g., General Data Protection Regulation, California Consumer Privacy Act, Securities and Exchange Commission disclosures, and U.S. state-specific laws) makes it imperative to ensure third parties adhere to stringent security protocols and data protection standards.
- Compliance and Regulatory Scrutiny: Financial institutions operate within a highly regulated environment and remain accountable for the actions and compliance of their third parties. Recent guidance from regulatory bodies emphasizes that third-party relationships do not absolve them of their compliance responsibilities, highlighting the direct link between a financial institution's accountability and its vendors' actions. Failure by a vendor to adhere to relevant regulations can result in significant fines, extensive and costly remediation/restitution, and legal repercussions for the financial institution.
- Reputational Damage: Negative incidents involving a third party, such as unethical business practices, data breaches, or service failures, can severely damage the reputation and brand image of the financial institution, eroding customer confidence.
- Concentration Risk: Over-reliance on a small number of critical third-party vendors can create concentration risk. If one of these key providers experiences difficulties, it can have a systemic impact on the financial institution's operations and the broader financial system.
- Evolving Threat Landscape: The sophistication of cyber threats continues to escalate, and third-party relationships are increasingly exploited as entry points by malicious actors. This is underscored by the fact that in 2023, the financial services industry was the most breached industry, accounting for 27% of all data breaches handled by a leading cyber risk firm.[3] While the healthcare industry surpassed financial services in 2024 to become the most breached (23%), the finance sector remained a close second at 22%.[4] Furthermore, a significant number of financial institutions (46%) reported experiencing a data breach from 2023 to 2024.[5] These stark statistics reveal significant vulnerabilities within the financial services supply chain that necessitate adaptive and robust TPRM programs. Financial institutions of all types, including banks, credit unions, investment firms, and insurance companies, are increasingly reliant on a complex web of third-party vendors for critical functions, expanding their attack surface and making them attractive targets for cybercriminals.
- Fourth-Party Risk: The risk extends beyond direct third-party relationships to their subcontractors and vendors (fourth parties). A lack of visibility and control over this extended ecosystem can introduce unforeseen vulnerabilities, making it crucial to manage this often-hidden layer of risk.
Best Practices for Effective Third-Party Risk Management
To navigate these complex challenges, financial institutions should adopt a comprehensive and mature approach to TPRM. Drawing from industry lessons and leading practices, the following elements are crucial:
- Establish a Strong Governance Framework: Effective TPRM begins with a well-defined governance framework that establishes clear policies, procedures, and accountability through defined roles and responsibilities. Consistent oversight from the board and senior management is necessary to ensure the program's success and alignment with the institution's risk tolerance. This governance structure should also foster a culture of integrated risk management and promote ongoing program enhancements.
- Implement Thorough Due Diligence: Robust upfront due diligence is essential for the effective selection and onboarding of third-party vendors. This critical process should encompass thorough assessments of a vendor's financial stability, security protocols, compliance record, and operational capabilities. These evaluations are fundamental to understanding the risks associated with each vendor relationship.
- Conduct Continuous Monitoring: TPRM is not a one-time exercise. A 2025 survey on TPRM indicates that nearly half (49%) of financial institutions experienced a vendor-related cyber incident in the past year, highlighting the persistent threat landscape.[6] Ongoing monitoring of vendor performance, financial health, security posture, and compliance with contractual obligations is essential. Leveraging analytical tools and data feeds to continuously monitor vendor performance and identify anomalies can significantly enhance risk detection, helping to address evolving threats and fourth-party vulnerabilities.
- Develop Risk-Based Segmentation: Not all third-party relationships present the same level of risk to an institution, making a risk-based segmentation approach crucial. By categorizing vendors based on their potential impact, institutions can strategically allocate resources and focus attention on those vendors that pose the highest risk. This ensures that appropriately sized processes are applied, with more rigorous controls for higher-risk vendors and streamlined processes for lower-risk ones, ultimately optimizing the efficiency of the TPRM program.
- Establish Clear Contractual Agreements and SLAs: Contracts should clearly define expectations, responsibilities, performance metrics, and service level agreements (SLAs). These SLAs should be measurable and incentivize desired behaviors from the third party, providing a clear framework for accountability.
- Enhance Technology and Data Capabilities: Utilizing an integrated technology platform can significantly improve the efficiency and effectiveness of TPRM processes. Organizations are increasingly moving away from manual TPRM processes towards dedicated software solutions, with a 19% increase in the use of TPRM software reported in a recent survey.[7] This trend reflects the need for automation to manage the growing complexity and volume of third-party relationships, especially given that TPRM program sizes often are not keeping pace with the increasing number of vendors to oversee. Centralized data repositories and formal data governance frameworks are crucial for gaining a holistic view of third-party risks, and advanced analytics and artificial intelligence (AI) can be leveraged to predict potential risks and automate aspects of risk management.
- Develop Robust Incident Response and Action Plans: A documented incident response plan specifically for third-party-related risks is critical. This plan should include clearly defined escalation paths and communication protocols for various risk triggers. Regular testing and simulation exercises are essential to ensure the plan's effectiveness and the readiness of relevant stakeholders.
- Manage Vendor AI Risk: Managing vendor AI risk is a growing concern, ranking as the second-highest TPRM risk for 2025.[8] Financial institutions are increasingly adding AI usage language to contracts and implementing specific due diligence measures to address potential issues like algorithmic bias, data privacy in AI models, and lack of transparency in AI systems.
- Mitigate Concentration Risk through Diversification and Resiliency: Actively assess and mitigate concentration risk by evaluating the over-reliance on a single or limited number of critical third-party vendors. Where feasible, diversify the vendor base for critical services and products. For unavoidable concentrations, implement enhanced monitoring, develop robust contingency plans, and establish formal exit strategies to ensure the financial institution's resilience against potential failures of these key providers. This includes understanding the fourth-party relationships of critical vendors.
- Optimize Resource Allocation: Despite an increasing number of vendors to oversee, TPRM program sizes are not keeping pace, with many organizations reporting lean teams. This resource constraint underscores the need for efficient and automated TPRM solutions, emphasizing the adoption of technology and a risk-based approach to prioritize resources effectively across the vendor landscape.
How Ankura Can Help
Ankura Financial Services Advisory brings deep expertise and a proven track record in helping financial institutions enhance their third-party risk management capabilities. Our experienced professionals understand the unique challenges and regulatory landscape of the banking and insurance sectors. We offer tailored solutions to help you:
- Assess and Mature Your TPRM Program: We can evaluate your current TPRM framework against industry best practices and regulatory expectations, identifying areas for improvement and developing a roadmap for maturity.
- Develop and Implement Governance Frameworks: We can assist in establishing clear policies, procedures, roles, and responsibilities to strengthen your TPRM governance.
- Enhance Due Diligence Processes: We can help you design and implement robust due diligence procedures for vendor selection and ongoing monitoring.
- Implement Risk Segmentation Methodologies: We can work with you to develop and implement risk-based segmentation approaches to prioritize your TPRM efforts effectively.
- Strengthen Contractual Risk Management: We can help you develop and review contracts and SLAs to ensure they effectively address potential risks and align with your risk appetite.
- Develop and Implement Continuous Monitoring Solutions: We can advise on the selection and implementation of technology platforms to automate and enhance your TPRM processes, improving data management and enabling continuous monitoring of your third-party relationships.
- Develop and Test Incident Response Plans: We can help you develop and test comprehensive incident response plans specific to third-party risks, including those involving fourth parties.
- Address Fourth-Party Risk: We can assist you in developing strategies and controls to gain better visibility and manage risks associated with your third-party subcontractors.
Partner with Ankura to build a resilient and effective third-party risk management program that protects your institution, your customers, and your reputation in today's complex financial ecosystem.
Notes:
[1] IBM Cost of a Data Breach Report 2024
[2] The Average Cost of a Data Breach in the Finance Sector is $6.08 Million, a Staggering 22 Percent Higher Than the Global Average of $4.88 Million - Wealth & Finance International
[3] 2024 Data Breach Outlook | Cyber Risk | Kroll
[4] Kroll Data Breach Outlook 2025 Healthcare Most Breached Industry
[5] 46% of financial institutions had a data breach in the past 24 months - Help Net Security
[6] Ncontracts 2025 Third-Party Risk Management Survey,
[7] Highlights from the State of Third-Party Risk Management 2025 Survey
[8] Highlights from the State of Third-Party Risk Management 2025 Survey
Sign up to receive all the latest insights from Ankura. Subscribe now
© Copyright 2025. The views expressed herein are those of the author(s) and not necessarily the views of Ankura Consulting Group, LLC., its management, its subsidiaries, its affiliates, or its other professionals. Ankura is not a law firm and cannot provide legal advice.
