Financial institutions that are subject to the Gramm-Leach Bliley Act (GLBA) can find practical tips that address their unique data security challenges in the 2019 Data Security Incident Report (DSIR). It appears that money remains a strong motivating force for many threat actors. According to the 2019 report, finance and insurance remain among the sectors most heavily impacted by data security incidents, with 19% of data at risk involving a financial account. Phishing (responsible for 37% of all incidents, according to our DSIR) and credential stuffing are among the primary ways that hackers can obtain the keys to a consumer’s financial kingdom – the username and password to an individual’s financial accounts. Armed with these credentials, threat actors can purchase goods or wire, transfer or otherwise move funds out of those accounts with remarkable speed and efficiency. Although multifactor authentication has become increasingly standard for money movement and other higher-risk financial account activity at major financial institutions, as reflected in GBLA regulatory guidance relating to authentication in an internet banking environment, threat actors have proven increasingly cunning, often taking over email accounts and spoofing mobile device IDs where financial institutions send one-time-PIN codes, in order to render these multifactor safeguards ineffective.

Our DSIR finds that third-party service providers and vendors (TSPs) are responsible for 11% of the data breach matters that Baker handles, and it advises entities as follows:

Continue to address vendor risks. Increase awareness of the need for all parts of an entity (e.g., marketing, HR, business) to work with security and legal to vet potential vendors, negotiate appropriate contract terms, and oversee vendors throughout their life cycle.

In recognition of these growing threats, federal regulators have placed greater scrutiny on financial institutions’ oversight of TSPs, which are heavily used in the financial services industry to carry out mission-critical functions. Mirroring that advice is the Semiannual Risk Review for Fall 2017 from the Office of the Comptroller of the Currency (OCC). In it, the OCC noted that operational risks at federally regulated financial institutions remain elevated because of increasing cyber threats and use of TSPs. Facing competition from fintech companies and other technology disrupters, banks have utilized TSPs and third-party collaborators to bring innovative apps and other digital products to consumers. The OCC expressed concern that increased outsourcing of financial institutions’ critical operations to TSPs creates greater cybersecurity risk, compounded by the consolidation of TSPs into a few large companies. In its report, the OCC noted that some of this systemic risk could be mitigated by appropriate due diligence and ongoing oversight.

Practical steps financial institutions take to oversee their TSPs include:

  • Due diligence and vetting on the front end of the deal: When vetting potential TSPs, we recommend asking additional questions to gauge the TSPs’ data security posture, such as: What is the service to be delivered? What types of personal data elements will be shared? What security controls are in place to safeguard the data? What kind of track record does the TSP have handling similar types of financial data? Does the TSP have sufficient cyber insurance available to address potential security incidents and financial losses?
  • Contractual provisions: Move beyond the use of boilerplate language such as “Comply with all applicable privacy and data security laws, including GLBA.” Rather, use the contract to require specific security safeguards, based on the types of nonpublic personal information at issue. Consider attaching a security exhibit or addendum to the TSP contract to outline the required security obligations and obtain appropriate contract remedies and indemnification for breach of those obligations.
  • Ongoing auditing: Don’t assume a lack of security incidents means the TSP is complying with its security obligations. In many instances, the lapses and gaps that lead to security breaches (failure to install hardware or software patches, lax background checks for vendor employees and contractors, inadequate enforcement of access controls) can be spotted well in advance of an attempted or actual security incident or network intrusion. Conduct regular audits, either as physical on-site audits or by requesting system logs and other documentation evidencing adherence to contract security requirements. Condition renewals of the contract on upgraded and enhanced security controls that are sufficient to meet evolving threats.
  • Don’t rely on a single vendor for a critical function: Although use of a single TSP could ease implementation burdens and provide economics of scale such reliance introduces a single point of failure in the event of a security incident. Particularly with cloud vendors, payment processors and network infrastructure providers, strategically spread your business among a group of selected, trusted TSPs. You obtain greater resiliency and the ability to shift work away from one TSP to another one if you identify weaknesses or gaps during audits.

TSP vetting and oversight is an ongoing and critically important function for GLBA-regulated institutions. OCC examinations have become more focused on systemic risk in this area because of the increasing role that TSPs play in banks’ ability to pivot and transform themselves into technology powerhouses that deliver first-in-class financial products and services that rival those of fintech companies. Cybersecurity can become a product to differentiate financial institutions from fintech competitors that may lack mature cybersecurity programs with robust vendor oversight. The DSIR contains a road map for financial institutions on how to accomplish those goals. For more information on the DSIR, click here.