PYMNTS MonitorEdge May 2024

Regulators Wary of Banks Outsourcing to Tech Firms

bank regulation

A top global banking regulator wants financial institutions to take more responsibility in outsourcing services.

“Ongoing digitalisation has led to rapid adoption of innovative approaches in the banking sector,” the Basel Committee on Banking Supervision said Tuesday (July 9) in a new report on outsourcing.

“As a result, banks have become increasingly reliant on third parties for services that they had not previously undertaken.”

This increased dependence on third parties — which include tech companies such as Microsoft, Amazon and Google — is “beyond the scope of traditional outsourcing,” the committee said.

Combining that issue with “the expansion of supply chains and rising concentration risks” has led the committee to update its 2005 paper on outsourcing in financial services. The committee is proposing 12 principles for banks and regulators, saying that banks’ boards have the final responsibility in overseeing third-party arrangements.

“As with all business processes, documentation evidencing key decisions (e.g. third-party strategy, board minutes reflecting decision to enter into a critical … arrangement) should be maintained in banks’ records,” Basel said in its consultation paper.

The committee said banks should practice “appropriate due diligence” for risks before contracting with third parties, monitor how the service is performing, and adhere to “robust business continuity” management so they can operate during a disruption.

This new report follows one from the Basel Committee in May examining the implications of the digitalization of finance, weighing both the risks and rewards offered by new technologies.

“While digitalization can benefit both banks and their customers, it can also create new vulnerabilities and amplify existing risks,” the committee said at the time.

“These can include greater strategic and reputational risks, a larger scope of factors that could test banks’ operational risk and resilience, and potential system-wide risks due to increased interconnections. Banks are implementing various strategies and practices to mitigate these risks, but effective governance and risk management processes remain fundamental.”

Meanwhile, a report last month by Reuters noted that bankers in Europe were growing increasingly worried about their industry’s dependence on a limited number of Big Tech companies for artificial intelligence (AI) capabilities.

Bahadir Yilmaz, chief analytics officer at ING, told the news outlet that banks need to be able to switch between different tech providers and not be locked into just one vendor.