Vendor Risk Management in the BaaS

As the financial industry continues to evolve, Banking as a Service (BaaS) has emerged as a transformative model that allows finance orgs, and fintech companies to offer services through APIs. While this innovation has its benefits, it also introduces a range of risks that must be carefully managed, some of these risks may include supply chain risk, regulatory risk, vendor financial stability, compliance risks, and more. We can explore the key risks associated with BaaS and how setting up Vendor Risk Management (VRM), and third party audit, can mitigate these challenges. 
 
Common risks in the industry: 
 
Compliance and Regulations Risk – The industry consists of multiple factors including finance frameworks and services; that introduce significant complexity and challenges for both consumers and financial entities. These complexities necessitate the establishment of various boards and policies designed to ensure compliance. Whether it’s Key consumer compliance, data protection or AMLs, auditors need to ensure that the company is compliant to meet these policies to avoid any penalties or seizures. 
 
Data Protection and Cybersecurity Risk -- In fintech and banking partnerships, managing critical information security risks is essential to safeguard sensitive data and maintain trust. Some of these may include data breaches, third-party vulnerabilities, insider threats, API vulnerabilities, etc.   
 
Financial Risk – Finance organisations are always exposed to liquidity and market risks. There needs to be a constant assessment of vendor financial health and capital; as well a preparing for business continuity plans. 
 
 

Here are some best Practice that we can apply: 
 
1. Establishing a comprehensive Vendor Assessment – This may include procuring security assessments, checking vendor compliance history, setting up a vendor framework and provide a reliability scale. With a set infrastructure, it is also important to keep relevant data to the industry including, financial stability metrics and operational capabilities. 
 
2. Setting up Risk Tolerance Tiers and Plotting Action Plans – By identifying and categorising risks, organizations can create targeted plans and procedures for addressing them, along with defining timelines for implementation. Establishing a vendor audit procedure will facilitate communication and governance of these action plans, ensuring that the organisation is aligned and aware of their responsibilities. 
 
3. Regular collaboration and rapport with Vendors -- Effective Vendor Risk Management (VRM) relies on strong communication with vendors as a crucial component of the Vendor Assessment process. Organisations should schedule regular connect with vendors to review performance, discuss compliance, and address any upcoming changes that could impact third-party programs. These open dialogues foster reliability and help strengthen the partnership.