From optional to urgent: The 3 third-party risk areas banks can’t afford to ignore today

Third-party risks may not be a new term for banks, but the frequency, complexity, and consequences of these risks have grown significantly. A Gartner survey of 100 risk professionals paints a clear picture of its impact: 84% of respondents reported operational disruptions due to vendor-related incidents, 66% experienced financial losses, 60% faced increased regulatory scrutiny, and 59% suffered reputational damage. Cyber incidents, reputational stumbles, and operational breakdowns tied to vendors are hitting harder and more frequently. Consequently, what once felt like “nice to haves” — stronger oversight, continuous monitoring, and proactive mitigation — are now necessities. Here are three critical areas where this shift is most needed.

Banks must monitor a vendor's cybersecurity, reputational health & operational stability continuously

Essential TPRM upgrades – No longer just “nice to haves”

Vendor cybersecurity

Cybersecurity has emerged as one of the most critical third-party risks for banks. In the past year alone, 97% of the top 100 U.S. banks experienced a third-party data breach, with many also facing breaches linked to their vendors’ vendors, revealing weaknesses across both third- and fourth-party relationships. Most recently, MainStreet Bank, a Virginia-based community bank, disclosed that a vendor breach in March exposed sensitive data belonging to roughly 5% of its customers, underscoring how even well-vetted providers can serve as attack points. These third-party compromises carry steep financial consequences, with the average cost of a breach in the financial sector now exceeding $6 million per incident.

What’s driving this surge? At its core, it's a growing imbalance between rapid tech adoption and lagging security investment. While 90% of banks now depend on third-party vendors for fintech and banking-as-a-service, a majority admit they struggle to align their security controls with the pace of innovation. Meanwhile, cybersecurity hiring has dropped by 19% in the past year, and many institutions (over 40%) still lack strong reporting capabilities, which undermines their ability to detect risks early. The result: prevention takes a backseat, with more emphasis placed on cleaning up after incidents than avoiding them in the first place.

Vendor reputational health

Banks operate in an environment where trust is everything. Customers hand over their money and personal data with the expectation that it will be kept safe. That’s why reputational risk is such a serious concern for financial institutions. Even a minor incident can damage public perception and erode customer confidence. In fact, Accenture reports that a single data breach can cause 62% of customers to lose trust in their bank, and over 40% to stop engaging with it altogether.

But what many banks overlook is that this reputational risk doesn’t just stem from internal failures. It extends to the ecosystem of third-party vendors they rely on to deliver everything from payment processing to customer service. When those vendors stumble, banks often share in the fallout, whether or not they were directly involved.

Take the Wirecard scandal, for example. The German payments company collapsed in 2020 after a $2 billion accounting fraud came to light. While Wirecard itself bore the brunt of the scandal, partner banks, including DBS and Citibank, were hit with over $2 million in regulatory fines for failing to adequately monitor the disgraced firm. More recently, Chime, a San Francisco-based digital bank, suffered a reputational hit and a $4.55 million fine after a third-party error caused weeks-long delays in issuing customer refunds. In both cases, the banks weren’t the root cause, but they still paid the price.

Vendor operational stability

Banks, on average, face 80% more operational risk incidents than other industries, a figure that reflects the deeply interconnected web of third-party relationships they depend on. As these external partnerships become more complex and interconnected, so do the operational risks associated with them. Just one weak link can trigger a chain reaction, disrupting critical services and halting day-to-day operations. This risk is especially acute when it comes to vendors managing customer-facing functions, where even minor breakdowns can lead to major reputational and financial fallout.

Missouri-based bank UMB Financial experienced this firsthand when a third-party provider responsible for handling customer service calls abruptly halted operations, leaving the bank scrambling to fill the gap and absorb the financial consequences. It’s a stark reminder that vendor risk doesn’t end at onboarding. Point-in-time financial reviews alone can’t predict when a partner’s stability is going to falter.

The good news? There are often early warning signs — if you know where to look. Shifts in customer sentiment, employee morale, investor behavior, and public disputes are all indicators worth watching. The Synapse bankruptcy is a case in point. Long before it collapsed, hurting partner banks like American Bank, Evolve Bank & Trust, Lineage Bank, and AMG National Trust, the red flags were already waving: disgruntled consumers, repeated layoffs, a conflict with one of its partner banks, and the loss of a key client. These were all early signals of brewing trouble.

How can banks do it all?

Banks today are expected to secure their entire network of digital connections, monitor a vast ecosystem of third-party partners, and maintain a real-time, holistic view of vendor health that goes far beyond traditional financial metrics. That’s easier said than done, especially when you’re dealing with hundreds of vendors, perennially understaffed TPRM teams, and legacy monitoring systems that simply can’t keep up with the evolving risk landscape.

So, how can banks do it all?

The answer lies in smarter, tech-enabled solutions. AI-driven, automated platforms like AQM-TRaiCE are transforming how banks approach third-party risk. AQM’s robust security testing services go far beyond surface-level audits, helping banks uncover hidden vulnerabilities across every level of their online architecture, from network and application layers to server and database. Just as importantly, they can extend this protection across the bank’s entire digital ecosystem, safeguarding against threats introduced through vendor relationships. 

Similarly, TRaiCE’s automated risk monitoring ensures banks aren’t caught off guard. By continuously tracking a wide range of key external and internal indicators of vendor health, from reputational red flags and ESG violations to supply chain disruptions, financial stress signals, regulatory non-compliance, and legal troubles, the platform builds a dynamic picture of vendor health.

This proactive approach allows banks to detect subtle but significant shifts in a partner’s stability long before they escalate into full-blown issues. Whether it’s a hidden cyber vulnerability, sudden leadership change, a drop in customer sentiment, or a lawsuit that hasn’t yet made headlines, AQM-TRaiCE flags early warning signs so banks can act swiftly, update vendor risk assessments, mitigate business continuity issues, and satisfy regulatory and risk oversight requirements. In a world where businesses can unravel overnight, this kind of early insight is no longer a luxury — it’s a necessity.

Want to know more? Contact us at info@aqmtechnologies.com or info@traice.io to get the conversation started!