Does your Vendor Program Need a Refresh?

As we enter 2025, it’s a good time to review your Third Party Risk Management (TPRM) program to meet examiner expectations. With community banks increasingly relying on third party vendors, examiners are focusing more on the associated risks. Regularly review your bank’s vendor program, typically it should be done at least annually. Use these tips to get started.

Five Vendor Management Tips Community Banks Should Follow

Effective vendor management is crucial for maintaining the integrity and security of your bank’s operations. Implementing a risk-focused approach ensurses that your vendor relationships are appropriately categorized and managed. This list of tips will guide you through the essential steps to segregate vendor relationships meaningfully, keep risk assessments up to date, avoid over-compliance, leverage vendor management software, and create clear reporting. Following these guidelines will help you streamline your Third Party Risk Management (TPRM) program and enhance its overall effectiveness.

• Segregate your vendor relationships effectively. The federal banking regulators released joint guidance last May, Third Party Risk Management – A Guide for Community Banks. One important directive is ensuring the vendor program is risk-focused. This can be achieved by analyzing third parties individually and categorizing them accordingly. Create categories with risk in mind, identifying vendors that perform “critical activities” (which may be referred to as “critical vendors,” “higher-risk,” or another term). Focus on these categories first. Some low-risk relationships may be excluded from TPRM entirely. Document all decisions in the vendor policy.
• Keep vendor risk assessments current. Changes in customer and product mix, operational changes, transaction volumes, compliance requirements, cybersecurity activities, and more will affect the risk of related third parties. As products and services evolve, review and update the assessed vendor risk as needed. At a minimum, update risk assessments for critical vendors (however defined) annually.
• Comply, but do not over-comply. Focus efforts on areas where there is real risk. Identify relationships with significant impacts and concentrate risk management efforts there. Consider creating a streamlined process for lower-risk relationships, with fewer oversight tasks or longer intervals between assessments. Ensure third parties are meaningfully segregated; if all third-party relationships are labeled as “critical” or “high risk,” none effectively are.
• Utilize vendor management software for TPRM tasks. While some banks still rely on policies and spreadsheets, many now use software to manage their vendor programs. Paying a third party for vendor management may seem costly, but time savings can justify the expense. A well-designed platform should include an integrated, customizable risk assessment tool and automate control documentation to mitigate risk. Storing vendor-related documentation in one system aids organization and retrieval.
• Establish clear reporting. Auditors and examiners will inquire about the TPRM program’s timeliness and effectiveness. Appropriate reporting to the bank’s risk committees and Board of Directors is also required. Ensure reporting clarifies vendor management effectiveness, both for individual vendors and for the overall program.