Vendor Management During the Coronavirus, Part 2: Considerations for Financial Institutions

  • April 29, 2020
  • Quantivate

COVID-19 Vendor Risk Considerations for Financial Institutions

Missed Part 1 of this series? Learn about the 6 due diligence questions that should be part of your COVID-19 vendor risk response.

The combined impact of COVID-19 and market recession has many institutions asking the question, “Where can we cut costs?” Organizations are not only struggling to face daily challenges, but are also looking down the road to plan for when resources become even tighter.

With that in mind, here are some things to consider when deciding whether to terminate a third-party relationship beyond just which vendors are critical and not critical.

1. Do any of your vendors make all or part of their revenue from processing debit or credit card transactions?

While it’s logical to expect a move to online transactions during quarantines, market uncertainty and instability encourage people to hold on tighter to cash reserves. In addition, more and more people are facing layoffs and making fewer purchases. Less spending equals less revenue from fees for those vendors, and massive layoffs means increased risk of missed payments.

2. Do any of your vendors make all or part of their revenue from credit insurance and loan add-on products?

The number of new mortgages has plummeted and, other than a very short spike in refinances due to the rate drop, the total number of opportunities for mortgage insurance is decreasing. In addition to managing the challenges of staffing shortages and telecommuting, mortgage lenders and servicers are overwhelmed by a wave of borrower inquiries about forbearance and loss mitigation options.

3. Do any of your vendors make all or part of their revenue from offering reward programs?

Reward programs generally apply to checking and credit products within a financial institution. With fewer new accounts opening and reduced account activity due to the pandemic and/or recession, the vendors for these programs may see diminished revenue.

4. With an expected decrease in lending, which of your supply vendors (lending pipeline) will be most impacted by this decrease in demand, such as auto dealers and mortgage brokers?

With the increase of defaults and foreclosures due to unemployment, the requirements for borrowers will be far more stringent. It’s fair to assume that total demand for new loans will decrease significantly in response to the market drop. Understanding which of your supply vendors will be most impacted by these changes is something to consider when deciding which vendors to keep.

5. Where can I consolidate services with more secure vendors?

Having a diversified vendor base is often a good idea in terms of mitigating risk and encouraging innovation, but during a recession, it’s wise to consider where your organization can increase efficiencies and consolidate contracts with single suppliers to generate cost savings. It’s important to have an accurate understanding of the vendor’s business continuity plan and how it derives its revenue. That information should be gathered during the due diligence phase of vendor management; however, these are unique times, and it’s important to reevaluate how vendors are navigating current challenges such as staffing shortages and the financial downturn. Vendors that don’t have much liquidity are going to need to borrow if they can, or else face the consequences of not being able to meet their contractual/operational obligations. Additionally, some vendors may feel pressure to shortcut internal controls, potentially increasing the likelihood of errors and/or fraud.

Resources for COVID-19 Vendor Risk Management

Every institution is doing its best to navigate very difficult times. Taking some time to request information from your vendors so that your institution can make informed, risk-based decisions is worth the effort and supports a holistic risk management strategy. While many of these considerations about your vendors may be gleaned from your due diligence process, understanding the economic impact of COVID-19 may require some additional information from your third parties for further risk assessment.

To jumpstart your preparation, read Part 1 of our “Vendor Management During the Coronavirus” series, which explores six due diligence questions you should be asking your vendors.

Or download the ready-to-use questionnaire and vendor email template in our COVID-19 Vendor Risk Management Toolkit:

DOWNLOAD THE TOOLKIT

Stay up to date with the latest news, compliance alerts, and thought leadership for banks and credit unions: