In the rapidly evolving landscape of cybersecurity, financial institutions face an ongoing battle to protect their systems and data. That battle extends beyond their own systems and data to those of their critical third-party vendors. Not only must they protect their own systems from cyberattacks, they must also ensure that the third-party vendors they rely on for a range of critical services are also keeping their data and systems safe.

Financial institutions and their third-party providers are attractive targets for cyber criminals. Report after report confirms that the financial services industry is one of the most popular targets for hackers. Third-party vendor breaches (also known as supply chain attacks) were the source of 17% of critical infrastructure data breaches in 2022, including at financial institutions, according to the IBM Security Cost of a Data Breach Report.

The stakes are high. Vendor cyber breaches don’t just damage an institution’s reputation. They cost a fortune. The cost of a data breach at critical infrastructure organizations averaged $4.8 million in 2022 – one million dollars more than in other industries, according to Verizon.

Beyond the financial cost and reputation damage, regulatory agencies don’t differentiate between financial institutions and third-party vendors acting on their behalf. If a vendor experiences a data breach, operational failure, compliance violation, or other cyber-related misstep, regulators will hold the financial institution just as responsible as if it was directly responsible for the shortfall. For example, the Consumer Financial Protection Bureau (CFPB) made a bank pay $27.5 million in customer reimbursements plus $7.5 million in restitution and civil money penalties when its vendor engaged in deceptive marketing or unfair practices when completing contracted work for the bank.

Vendor Management as the First Line of Defense

Regulators require financial institutions to have effective third-party vendor management programs. This is defined as the processes, policies, and practices used to oversee the relationships and activities with third-party vendors, fintechs, consultants and others. As financial institutions have increased their reliance on third parties for services, technology solutions, and products critical to their operations, vendor management has become more important.

Effective vendor management enables financial institutions to maintain strong vendor relationships, optimize operational efficiency, mitigate risks, ensure regulatory compliance, and safeguard the institution's reputation and customer trust.

Vendor management includes vendor due diligence, ongoing monitoring, and contract management to ensure financial institutions can access information about the effectiveness of a vendor’s cybersecurity, such as SOC reports and test results. This helps financial institutions evaluate the maturity and effectiveness of a vendor’s cybersecurity program.

Protecting Financial Institutions with Vendor Cyber Monitoring

To bolster their defenses, financial institutions are turning to vendor cyber monitoring—a powerful tool that offers real-time insights into the cybersecurity practices of their third-party vendors.

Vendor cyber monitoring used within cyber security risk assessment tools, when coupled with an institution's existing vendor management program, provides invaluable advantages. Unlike conventional approaches that rely on retrospective analysis, this proactive monitoring allows financial institutions to continually assess their vendors' cybersecurity posture. By observing vendors in real-time, institutions can determine whether their vendors employ the latest security measures, hold necessary certifications, and if their names surface on the dark web—a potential indication of an impending attack.

Other benefits of third-party vendor cyber monitoring include:

1. Enhanced Incident Identification and Resolution

Vendor cyber monitoring enables financial institutions to gain deeper insights into their vendors' ability to identify and resolve cybersecurity incidents effectively. By monitoring vendors in real-time, institutions can determine if they are detecting issues before the vendors themselves. This monitoring helps differentiate between minor issues and potentially serious vulnerabilities.

Prompt issue resolution is essential, and monitoring allows institutions to ascertain if vendors promptly address identified issues. By comparing cyber monitoring reports with vendors' self-reported and third-party reports, such as SSAE 18s and penetration testing, institutions can ensure consistency and make informed decisions about their vendor relationships.

2. Optimized Resource Allocation

Regulations require financial institutions to identify high-risk, critical, or significant vendors. Vendor cyber monitoring plays a vital role in refining these assessments by providing tangible evidence of vulnerabilities in vendors' cyber controls.

By integrating monitoring data with existing risk assessment information, institutions can prioritize vendors that pose a higher risk. Vendors with existing vulnerabilities or a history of vulnerabilities warrant greater scrutiny and require additional oversight and monitoring resources. This targeted approach ensures that resources are allocated efficiently to mitigate potential risks effectively.

3. Proactive Risk Mitigation

The constantly evolving threat landscape makes it challenging for financial institutions to stay ahead of emerging risks. Vendor cyber monitoring equips institutions with the capability to detect and identify emerging cyber risks in real-time.

By proactively reaching out to vendors and assessing their internal operations, institutions can take preventive measures to address specific issues promptly. This proactive stance empowers institutions to mitigate risks more effectively, reducing the potential impact of cyber threats on their systems and data.

4. Comprehensive Documentation and Ongoing Monitoring

Vendor cyber monitoring facilitates comprehensive documentation and ongoing monitoring of the vendor relationship. It allows institutions to assess vendors' adherence to essential security aspects, including system protection, internal controls, data security, and cloud risk.

Monitoring physical access, systems control, secure email, and customer data, and verifying the presence of robust internal controls become integral parts of the ongoing monitoring process. Evaluating data transmission and storage protocols, as well as secure data destruction procedures, ensures that vendors meet the necessary security standards. Additionally, vendors relying on cloud-based systems require meticulous examination due to the associated risks.

In light of cybersecurity regulations and the escalating frequency of cyberattacks and breaches, vendor cyber monitoring has become an indispensable investment for financial institutions. By implementing this proactive approach, institutions can ensure that their third-party vendors prioritize cybersecurity measures and diligently protect systems and data. Vendor cyber monitoring acts as a crucial line of defense, fortifying institutions against potential threats and safeguarding the integrity and confidentiality of their operations.