Collaboration with technology companies can serve as an equalizer and multiplier for community banks, allowing them to modernize operations and scale at a much faster pace. But with increased usage of third-party products and services, vendors are no longer a supporting function for the back office—they are transforming into an extension of the bank itself. With that dynamic shift comes an increase in third-party risk that community banks must manage.
The importance of managing vendor risk
As noted in my previous post, risk mitigation plays a critical role in effective vendor management, and as you would expect, third-party risk management can be particularly challenging. In fact, the Conference of State Banking Supervisors’ 2025 Annual Survey of Community Banks notes that vendor risk management can act as impediment to technology implementation.
Add to that scenario the rise in fourth-party risk. When your partners or customers are working with subcontractors or other organizations outside your primary contract, the relationship becomes increasingly hard to manage.
While more than half of financial institutions (58%) review their vendors’ third-party risk management programs, roughly a quarter (26%) don’t assess fourth-party risk, according to research from ICBA Preferred Service Provider Ncontracts. Given that regulators view third-party risk as bank risk, when a vendor has issues, it’s the community bank that must answer to customers and regulators.
Those facts present a paradox for community banks—balancing the upside of partnering to innovate with the additional supervision and resources required to ensure the safety and security of these solutions.
Tips for practical third-party risk management
For community banks, it’s about taking third-party relationships in stride and finding a manageable approach to oversight. These relationships aren’t insurmountable; they simply require a bit of extra care and handling. The following six tips can help you navigate your relationships in an accessible, practical, and efficient manner:
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Institute consistent check-ins with vendors. Think about these relationships as strategic partnerships, with regular communication to help stay informed about what’s new and what’s changing. These conversations will allow you to remain on top of your tech stack and ensure consistency and standardization with your vendor partnerships. You can also point to these efforts when meeting with your regulator, noting them as a built-in safeguard in a fast-moving industry.
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Recognize the individual risk profile of the vendor. Not every vendor warrants the same scrutiny. Identify the criticality of the vendor, how that vendor interacts with others, and what that truly means from a risk perspective. That will help you in tailoring your risk management program directly to those needs.
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Spread out responsibility through the bank. Not every vendor oversight should fall on your compliance team. Product owners can offer deeper knowledge of the solution’s functionality and can help identify when new releases may require a deeper risk assessment.
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Ensure the vendor has appropriate risk mitigation in place. Any vendor should be able to present you with a due diligence package that makes it clear they understand that supporting community banks means supporting their regulators, too. Confirm that they are prepared with transparency and clear answers about data, subcontractors, and fourth-party risk. Remember, risk management is a shared responsibility. If you get pushback from the vendor, it’s a red flag.
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Put it in the contract. Be honest and upfront with the vendor on how you want to manage risk and what you expect from them—and hold them accountable for what they agree to do.
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Review existing guidance. ICBA shared its overarching thoughts on third-party risk management with the OCC back in January; it’s worth another read as federal regulators have launched a comment period to update their advice to reduce friction [see sidebar]. Keep that guidance—and its pending evolution—in mind as you consider potential partners.
While third-party relationships can be challenging, they also lead to strong product offerings that support your banks, customers, and communities. It is your responsibility to ensure you understand what your vendors are doing, but doing so does not have to be a daunting task.
By implementing simple protocols around your vendor risk management, you will reap the benefits of both worlds, balancing effective risk mitigation with a strong innovation program to expand your offerings and support your business objectives.
Adam Mahone is senior vice president of innovation operations at ICBA.