The growing importance of vendor management for financial institutions

Mar 08, 2020

With a new decade upon us, financial institutions are constantly looking for the best technology to fit the needs of their growing institutions. Broadening their technology capabilities allows institutions to grow their market share and attract new cliental. As younger generations seek out more advanced technology, institutions are constantly faced with engaging more software platforms (often in an outsourced environment) to attract this newer wave of customers. Financial institutions are seeking out newer FinTech company’s software platforms or launching core legacy provider’s top performing ones. With the constant push towards a digital transformation in the financial services industry, institutions are needing to grow and improve their vendor management programs to ensure risks are mitigated sufficiently at the same time.

Standard vendor management programs focus on noting items such as contract terms, Service Organization Controls (SOC) reports, financials and a few others. However, in the past this was a straightforward process due to the strength of the core legacy and other major FinTech provider’s reputations. With newer FinTechs gaining more cliental in the market, vendor management programs need to focus on more detailed items when performing an analysis.

Shifting a standard vendor management program to one that analyzes key details within items such as the financials, SOC reports and more is crucial especially when evaluating a newer FinTech. For example, when analyzing a vendor’s financials, an institution should ensure the working ratio is greater than 2.5, the quick ratio is greater than one, and their debt to equity ratio is less than 1.5. These ratios provide clear guidance on the financial stability of a vendor no matter how established they may be. For newer FinTechs, an institution should also pay close attention to the cash flow statement as provided. If there is a decrease from the beginning of the year to the end of the year, then this vendor is less likely to pay their short-term liabilities as quickly. This warrants a concern if it is consistently happening year after year with startups, as this could lead to failure.

Analyzing contract terms is also critical before signing any statements of work. Due to the core legacy providers reputation for instilling long terms, newer FinTechs are providing short term contracts to gain competitive advantage in the market. However, renewal terms can be where institutions are locked in for longer times than anticipated. Understanding early termination fees associated with a contract is crucial in case a FinTechs performance declines in the future.

As financial institutions are seeking to grow their technological capabilities, regulators are also raising the importance of vendor management. Focusing on key details, like those mentioned above, whenever you are engaging with a newer FinTech firm as well as more established organizations is crucial to mitigate risk. Ensuring a vendor management program that is efficient from the valuation phase to their annual process is critical. As you look to review your vendor management policies and procedures this year, consider whether your program is in need of an update to include enhancements such as these—especially if you have been increasing the amount of technology vendors your fir