Why banks and fintechs must master vendor governance before innovation becomes a liability.

Introduction

As banks and fintech firms increasingly rely on third-party vendors — from cloud providers to identity-verification platforms — they face a complex web of operational, regulatory, cyber, and systemic risks. This article defines “third-party risk” in banking/fintech,
examines real-world examples, and unpacks the what, where, when, why, who, and how of such risk. It then reviews the mandatory governance, risk management, and control regimes in the U.S., the U.K., and the EU. Finally, it outlines current best practices for
managing third-party risk, drawing on regulatory guidance and emerging industry standards.

Part I — What Is Third-Party Risk in Banking and Fintech?

Definition & Context

In the banking and fintech world, third-party risk refers to the risk a financial institution (bank, fintech, payment provider) assumes when it outsources — or otherwise relies on — external parties (vendors, service providers, contractors,
fintech partners) for services, products, or business functions that support its operations. (Federal
Reserve)

Third-party relationships in this context can include: outsourced IT services (e.g., cloud computing), identity-verification or fraud-prevention platforms, payment processing, KYC/AML checks, data storage, customer-facing fintech partnerships (e.g., “banking-as-a-service”
models), consulting, joint ventures, referral arrangements — even relationships without a formal contract if the third party is materially involved. (Federal
Reserve)

Example 1: A traditional bank partners with a fintech via a “banking-as-a-service” (BaaS) arrangement. The fintech fronts the customer interface (mobile app, user experience), while the bank provides the regulated deposit and balance-sheet
infrastructure. The bank depends on the fintech’s tech, compliance, and operational maturity — exposing itself to risk if the fintech fails in identity-verification, fraud control, data protection, or downtime. (Wikipedia)

Example 2: A bank outsources its core IT infrastructure (e.g., cloud hosting, data processing) to a global cloud provider. If the cloud provider suffers an outage — or a cyber breach — the bank’s systems, customer data, and operations may
be disrupted, even though the bank does not directly control that infrastructure.

Thus, third-party risk is not hypothetical: it’s real, multi-dimensional, and increasingly central to safe banking / fintech operations.

The “What, Where, When, Why, Who, and How” of Third-Party Risk

• What: The risks arising from third-party relationships: operational risk (service failures, downtime), cyber/security risk (data breach, unauthorized access), compliance risk (non-compliance with regulations such as AML, data protection),
  strategic risk (business strategy reliant on a vendor), concentration risk (over-reliance on a few third parties), reputational risk (vendor misconduct, failure), systemic risk (if many banks depend on the same critical vendor). (Federal
  Reserve)
• Where: Across any function that a bank or fintech outsources or delegates — IT/cloud services, customer onboarding, payment processing, KYC/AML, data storage, core banking infrastructure, and also in fintech-bank partnerships (e.g., BaaS).
  The “where” extends globally; vendors may be domestic or based abroad, including third-country (non-domestic) providers. (OCC.gov)
• When: Anytime a third-party relationship is initiated, or during its lifecycle — from planning and selection, through contract negotiation, to active service delivery, monitoring, and termination / exit. Risk evolves over time: a vendor
  may degrade, become vulnerable, or sub-contract out further (fourth-party) over time, making ongoing risk management critical. (Federal
  Reserve)
• Why: Because using third parties offers benefits — access to advanced technologies, specialized services, cost efficiency, speed to market, scalability, and innovation (especially via fintech partnerships). But those benefits come at the
  cost of reduced direct control over critical operations, increased complexity, regulatory exposure, and potential systemic risks. (Federal
  Reserve)
• Who: The “who” involves multiple stakeholders: the financial institution (bank or fintech), its board and senior management, its risk/compliance/technology departments, legal/contract teams — and the third-party vendors themselves, including
  their subcontractors. In fintech-bank partnerships, accountability may blur, but regulatory guidance emphasizes that the bank remains responsible. (Federal
  Reserve)
• How: Through a structured, risk-based lifecycle framework — identifying and inventorying third-party relationships; performing due diligence before vendor selection; contract negotiation with appropriate safeguards (service-level agreements,
  exit clauses, data access rights, audit rights, compliance obligations); continuous monitoring and periodic risk reassessments; and planning for termination/exit to avoid service disruption or operational disruption. (Federal
  Reserve)

In short, third-party risk in banking and fintech is the risk that a bank or fintech’s reliance on external parties — vendors, partners, service providers — will create vulnerabilities that can affect operations, compliance, customers, and even systemic
stability.

Part II — Regulatory & Mandatory Frameworks: U.S., U.K., and EU

As third-party risk has become more pervasive, regulators across jurisdictions have tightened requirements. Here is how the regulatory landscape looks for banking / fintech institutions in the
USA, the UK, and the EU.

United States

In the U.S., the three main banking regulators — Board of Governors of the Federal Reserve System (Fed), Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency (OCC) — jointly issued updated guidance on third-party risk
management, effective June 2023. (Federal Reserve)

• Scope: Applies to all banking organizations supervised by these agencies. It covers any “third-party relationship,” regardless of whether the arrangement is formally labelled “outsourcing” or involves compensation. (Federal
  Reserve)
• Lifecycle framework: The guidance outlines all stages — planning, due diligence and third-party selection, contract negotiation, ongoing monitoring, and termination. (OCC.gov)
• Risk-based approach: Not all third-party relationships present the same level of risk; risk management should be commensurate with the nature of the service, the risk profile of the bank, and the criticality of the activity. (Federal
  Reserve)
• Responsibility remains with the bank: Use of third parties does not diminish a bank’s obligation to operate in a “safe and sound manner” or comply with legal and regulatory requirements. (Federal
  Reserve)

In addition, in May 2024, the agencies issued a guide aimed at community banks — a recognition that risk-management principles must also apply to smaller institutions leveraging third parties to stay competitive. (OCC.gov)

Practically, this means U.S. banks or fintechs partnering with banks must: maintain a complete inventory of all third-party relationships; assess risks at inception and periodically; undertake appropriate due diligence (legal, operational, compliance, cyber);
negotiate robust contracts; monitor performance; and set exit strategies. (Federal
Reserve)

Because the guidance explicitly mentions fintech partnerships, platforms built by or relying on fintechs (e.g., for payments, banking-as-a-service, identity, KYC/AML) must also comply — meaning fintechs become “first-class citizens” in third-party risk frameworks,
even if not directly regulated as banks. (Federal Reserve)

United Kingdom

In the U.K., multiple regulatory initiatives have converged to tighten scrutiny on third-party risk for financial firms, including banks, fintechs, payment institutions, infrastructures, and critical third-party providers.

• The Financial Conduct Authority (FCA) — via its Handbook (e.g. SYSC 3.1.1R and SYSC 4.1.1R) — requires firms to maintain adequate risk management systems and controls for third-party arrangements, whether or not strictly defined as “outsourcing.” Firms
  are accountable for all regulatory obligations, even when using third parties. (FCA)
• The Bank of England (BoE) and Prudential Regulation Authority (PRA) have introduced a regime to oversee “critical third parties” (CTPs) — third-party providers whose failure or disruption could threaten the resilience of the financial sector. Under the
  proposals (e.g., CP17/24), firms may be required to maintain a “register” of material third-party arrangements, submit notifications to regulators, and periodically report incidents. (wwwtest.bankofengland.co.uk)
• For outsourcing and third-party risk management generally, including non-bank payment service providers and infrastructures, the BoE issues supervisory statements requiring firms (and relevant infrastructures/market participants) to identify, assess, monitor,
  and control third-party risks within a board-approved risk appetite. Boards must approve and periodically review third-party risk policies, as part of the outsourcing policy, and these policies must align with business-continuity, data protection, cyber &
  IT, operational resilience, conflict-of-interest, and broader risk management strategies. (Bank
  of England)
• The BoE’s expectations cover both “outsourcing” and non-outsourcing third-party arrangements (i.e., any third-party dependency that could impact operations or obligations). (Bank
  of England)
• Regulators expect firms to manage concentration risk (over-reliance on the same provider, sub-outsourcing chains, single points of failure) — especially when multiple institutions use the same cloud or infrastructure provider. (Bank
  of England)

In short: U.K. firms — banks, fintechs, payment institutions, infrastructures — must adopt robust, board-level third-party risk governance, maintain up-to-date registers, report material dependencies and incidents, and ensure resilience even if a third party
fails or is disrupted.

European Union

In the EU, regulators are advancing a harmonized regime for third-party risk management, especially as financial institutions outsource more functions and rely increasingly on non-bank service providers (fintechs, cloud providers, back-office vendors, etc.).

• The European Banking Authority (EBA) is in the process of replacing its 2019 outsourcing guidelines with a new, broader framework: the “Guidelines on the sound management of third-party risk.” As of July 2025, the EBA has launched a public consultation.
  (European
  Banking Authority)
• Under the new draft Guidelines, “third-party arrangements” include not only classic outsourcing but also any service, process, or function provided by third parties (even non-ICT). The new guidelines are designed to align non-ICT third-party risk management
  with the stricter regime already in force for ICT services under the Digital Operational Resilience Act (DORA). (European
  Banking Authority)
• The draft Guidelines cover the full life cycle: risk assessment, due diligence, contracting (including sub-contracting), ongoing monitoring, exit strategy / termination. Institutions must maintain registers of third-party arrangements; the regulation permits
  a unified register that spans ICT and non-ICT services. (European
  Banking Authority)
• The obligations are risk-based and proportional. Critical or important functions (e.g., core banking, major services) require stricter oversight, while less critical services may be subject to lighter requirements. (European
  Banking Authority)
• Meanwhile, under DORA (effective from January 2025 for ICT-related risks), financial institutions must ensure operational resilience when using third-party ICT providers — including cloud vendors, data-hosting providers, software vendors, etc. The forthcoming
  EBA framework for non-ICT third parties is intended to complement DORA. (European
  Banking Supervision)
• The overarching aim is consistent: to ensure that outsourcing or third-party relationships do not turn financial institutions into “empty shells” lacking operational substance or control. Board-level accountability, internal governance capacity, ability
  to access data, and compliance with EU laws (data protection, prudential rules, consumer protection) remain mandatory. (European
  Banking Authority)

Part III — Current Best Practice in Managing Third-Party Risk (Bank/Fintech Level)

Given the definitions, risks, and regulatory frameworks, what does “good” third-party risk management look like today at a bank or fintech? Here is a best-practice blueprint, structured again via the what/where/when/why/who/how lens, with practical examples.

What & Where: Inventory, Classification, and Criticality

• Maintain a comprehensive inventory of all third-party relationships — including not only formal outsourcing contracts, but also partnerships, referral arrangements, fintech collaborations, non-ICT vendors, subcontractors, cloud providers,
  data-hosting services, payment processors, API providers, identity-verification tools, fraud-detection services, consultants, etc.
• Classify each third party by criticality: e.g., whether they provide a “critical or important function” (e.g., core banking, deposit-account infrastructure, cloud hosting of core systems, customer data storage, KYC/AML, payment execution)
  vs. non-critical (e.g., office supplies, facilities, non-core IT support). This classification should drive the intensity of oversight.
• Map dependencies and concentration risk: Understand if multiple functions are dependent on a single vendor; check sub-contracting or fourth-party risk; assess whether switching vendors is feasible or involves vendor lock-in.

When & How: Lifecycle Risk Management

• Prior to onboarding / contracting:
  • Perform due diligence that covers financial health, operational resilience, cybersecurity posture, regulatory/compliance history, data-protection practices, business continuity plans, subcontracting practices, conflict of interest, and
    governance structure.
  • Involve relevant internal stakeholders — compliance, legal, risk, IT, operations — and, where appropriate, senior management or board (especially for critical services).
  • Negotiate robust contracts: service-level agreements (SLAs), data-access and audit rights, right-to-exit/termination clauses, incident-reporting obligations, subcontractor restrictions, data protection clauses, business continuity and disaster-recovery
    obligations.

• During the relationship:
  • Implement ongoing monitoring and oversight: performance metrics, periodic risk reassessment, compliance checks, security audits, vendor audits or reviews, monitoring of subcontractors.
  • Maintain up-to-date documentation and register of all third-party relationships, changes, incidents, sub-contracting — as required by regulators (e.g., under U.K. PRA/FCA proposals, EU draft guidelines).
  • Establish and test business continuity and incident response plans: what happens if the vendor fails, gets breached, becomes insolvent, or must be replaced; where are backups; can operations continue or be migrated.
  • Conduct periodic governance and board oversight: regular reviews of third-party risk policy, vendor risk reports, concentration risk, risk appetite, vendor performance, and sufficiency of resources for oversight.

• At termination / exit:
  • Execute well-defined exit strategy: ensure data return or destruction, transition to alternate vendors or internal capabilities, closure of access rights, compliance with data-protection laws, record retention, and audit trails.
  • Perform post-mortem reviews: evaluate vendor performance, lessons learned, gaps, risk-mitigation improvements, and update vendor policies/processes.

Who & Why — Accountability, Culture, and Board Involvement

• Board and senior management retain ultimate accountability: Even if services are outsourced, responsibility for safe operations, compliance, cyber resilience, and regulatory obligations remains with the bank/fintech. This is a core principle
  across U.S., U.K., and EU regulatory frameworks. (Federal Reserve)
• Cross-functional oversight: Risk, compliance, IT/security, legal, operations — all should play roles in vendor selection, due diligence, monitoring, and governance. For fintech-bank partnerships or innovative business models (e.g., BaaS),
  this cross-functional collaboration is critical.
• Risk-based and proportional approach: Not all vendors need the same level of scrutiny; institutions should apply more rigorous controls to vendors providing critical or high-risk services. This reduces burden while focusing resources where
  they matter most.
• Embedding third-party risk into the institution’s overall risk culture: Third-party risk should not be an afterthought — it should be part of the institution’s operational risk, cyber risk, compliance risk, and business continuity / resilience
  frameworks.

Examples of Best Practice

• Bank-Fintech BaaS partnership: A regulated bank partners with a fintech to deliver a mobile banking app. Before launch, the bank performs deep due diligence — examining the fintech’s identity verification and fraud controls (e.g., KYC,
  AML), assessing data-protection procedures and infrastructure, reviewing the fintech’s business continuity and disaster recovery plans, and embedding audit and compliance clauses into the contract. During the partnership, the bank runs periodic audits, monitors
  performance and compliance metrics, and holds the fintech to incident-reporting requirements. In parallel, the bank maintains an exit plan — the ability to migrate customers and data in case the fintech fails or violates terms.
• Cloud outsourcing of core banking infrastructure: A bank moves its core banking systems to a major cloud provider. The bank classifies this as a critical function, conducts an extensive assessment of the cloud provider’s security, resilience,
  and subcontracting practices; signs a contract with strict SLAs, data access rights, incident/quarantine procedures; implements continuous monitoring, penetration tests, and compliance audits; keeps its own backups and disaster recovery plan; and periodically
  reviews the provider’s adequacy under its board-approved risk appetite.
• Diverse vendor ecosystem & concentration risk management: A fintech uses several vendors for payments, identity verification, data analytics, fraud prevention, and customer support. The fintech (or partner bank) ensures that not all functions
  depend on a single vendor, periodically assesses overall vendor concentration risk, and retains the option to replace vendors. For each vendor, due diligence, contract clauses, monitoring, and exit plans are maintained.

In addition, some forward-looking institutions experiment with innovative approaches — for instance, frameworks based on distributed, immutable audit records such as blockchain to track vendor assessments, audit trails, compliance attestations, and vendor
changes over time. (arXiv) While still nascent, such approaches may help
increase transparency, reduce human error, and improve traceability of vendor-related risks in complex ecosystems.

Conclusions

The increasing reliance of banks and fintech firms on external vendors, service providers, and fintech partners brings both opportunity and risk. Third-party relationships — if not properly governed — can expose institutions to operational failures, cyber
breaches, compliance violations, reputation damage, and even systemic risk.

Regulators in the U.S., U.K., and EU have responded — developing, updating, and harmonizing frameworks to govern third-party risk, pushing for consistent, lifecycle-based, risk-based vendor oversight. In particular, the U.S. interagency 2023 guidance, the
U.K.’s proposals for overseeing critical third parties, and the ongoing work by the EBA (in light of DORA) illustrate the global recognition that third-party risk is a first-order concern.

For banks and fintechs, adopting “best practice” third-party risk management is not just regulatory compliance — it is a strategic imperative. This entails maintaining a comprehensive vendor inventory, classifying criticality, conducting robust due diligence,
negotiating strong contracts, continuous monitoring, embedding vendor risk into overall risk governance, ensuring business continuity, and planning exit strategies.

As financial services continue to evolve — with more banking-as-a-service models, API-driven fintech integrations, cloud-native infrastructures, and global vendor ecosystems — institutions that master third-party risk management will build more resilient,
trustworthy, and sustainable businesses.