As the financial services industry shifted to digital and opened up new opportunities, it also acquired new areas of risk. In the extended digital supply chain, there are many more ways for vulnerabilities to develop that can lead to data breaches, cyber-attacks, and damage to your business. 

Significant new risks coalesce around fourth parties. These are the vendors, service providers, and other entities who work with your third parties. You might not know who they are, but they’re linked to your organization, and that’s the crux of the problem. 

Fourth-party risk is lurking just out of sight, threatening your business continuity, financial stability, reputation, cybersecurity, and more. Any disruption in fourth-party services can cause cascading impact, particularly due to concentration risk. This is when many of your third parties rely on the same fourth party, such as a single cloud provider. If that fourth party goes down, so do all your third parties, taking with them much of your operational capability. 

Fourth-party access to your sensitive financial and/or customer data increases your attack surface for data breaches, and if their reputation is damaged, it harms yours too by association. Additionally, many regulations require you to manage risks throughout the supply chain. If you ignore fourth-party risk, you could be hit with fines and penalties, as well as risking your operations and reputation. 

In this article, we’ll discuss the unique challenges involved in managing fourth-party risk, and explore solutions and best practices that help you gain control over fourth-party risk. 

The Growing Complexity of Supply Chains in Financial Services

Now that financial services companies offer digital products and meet customers on multiple channels, they rely even more on vendors and subcontractors. It takes an army of specialists to maintain services like cybersecurity, IT infrastructure, and tech support, and your third parties can’t do it all themselves. They subcontract services from other companies, creating a network of fourth-party relationships. 

For example, you might contract a third-party IT service provider to manage data storage, and they use a fourth-party cloud service like Amazon Web Services (AWS) or Microsoft Azure. Or your third-party customer data analytics provider might use a fourth-party platform for deeper insights. 

Each new entity brings a new layer of risks. You have to ensure that every party in your supply chain adheres to the same regulatory standards, upholds data security, and has procedures in place to maintain operational continuity. But fourth-party risk management comes with its own challenges. 

Key Challenges in Managing Fourth-Party Risk

In such a complex environment, managing risk is harder than ever. You need to verify that all your fourth parties comply with regulations, enforce robust cybersecurity practices, and meet your own standards around ethical practice. But there are a number of specific obstacles in the way:

  • Lack of direct control and visibility into fourth-party activities 
  • Navigating complex regulations that vary between different jurisdictions
  • Monitoring and assessing ongoing cybersecurity measures

Here’s a more detailed look at the main challenges in fourth-party risk management. 

Lack of Direct Control and Visibility Over Fourth Party Vendors

The first major stumbling block is that your fourth parties are, by definition, some way down the supply chain from your organization. You don’t have any direct relationship with them, so you can’t write security obligations or risk management requirements into a contract, or review their risk policies and governance. 

You have to rely on third-party vendors to manage and mitigate fourth-party risk, which undermines transparency and makes it hard to gain accurate, timely information. This increases the chances that vulnerabilities will go undiscovered and potential disruptions and non-compliance can fester unnoticed until they erupt. 

Complex Regulatory Requirements

The complicated regulatory climate only adds to the difficulties. Regulations like GDPR, which governs data privacy, and DORA, which mandates resilience for financial services, involve stringent data protection, cybersecurity, and operational resilience requirements for your entire supply chain, including fourth-party vendors. 

Your fourth parties are liable to be strung out around the world, which means you need to verify compliance across a number of different jurisdictions. Each region could have its own regulations, which may not mesh easily with each other. Managing oversights, audits, and monitoring for all these regulations can be resource-intensive and stressful. 

Difficulties in Assessing and Continuously Monitoring Fourth Party Cybersecurity Practices

Your lack of direct access to your fourth parties also makes it extremely difficult to implement ongoing assessment and continuing monitoring for their cybersecurity practices and business governance. You’re unlikely to be able to see their security protocols or audit their cybersecurity practices, which means that you have to rely on the third parties who connect you in the supply chain. 

Unfortunately, this can create serious blind spots. Cybersecurity threats are dynamic and constantly changing, so you need to be certain that your third parties are meeting your standards of real-time vigilance. 

Potential Cybersecurity Threats from Fourth Party Vendors

The difficulties in effective fourth-party risk management are high, but the threats are higher. Every entity in your supply chain serves as another potential entry point to malicious actors, creating a source of vulnerabilities and accidents that can lead to data breaches and leaks. 

Your fourth parties are part of your supply chain because you or your third parties rely on them for important services. If they can’t operate as normal, it could cause a waterfall effect that puts your third parties out of action, which in turn prevents you from delivering financial services. 

In addition to DORA, which specifies fourth-party compliance, many regulatory standards include fourth-party activity. GDPR, CCPA, GLBA, and HIPAA all have data privacy clauses that influence fourth-party data handling. ISO/IEC 27001, SOX, and PCI DSS set strict security measures that extend to fourth-party relationships, and Basel III banking regulations include extended supply chains. If your fourth parties fail to comply, you could be exposed to fines and penalties.  

Solutions for Managing Fourth Party Risk in Financial Services

The good news is that there are effective and actionable steps that you can take to overcome the challenges of fourth-party risk management and safeguard your organization from the range of fourth-party risks. These include:

  • Extending third-party risk management (TPRM) programs to include fourth-party risk
  • Utilizing risk management platforms to track and monitor fourth-party risk
  • Holding third parties accountable for fourth-party risk management 

Read on for a deeper exploration of the best ways to implement these solutions. 

Strengthening Third Party Risk Management Programs to Include Fourth Party Assessments

One of the simplest, but highly effective, solutions for fourth-party risk management is to build it into your existing third-party risk management (TPRM) policies. As part of your due diligence, request that third parties provide visibility into fourth-party relationships, and detail the security and risk management measures they take to mitigate their own risks. 

Hopefully, you already onboard new vendors and contractors using security questionnaires, evaluations, and audits. Now add questions about their approach to their own vendors and contractors. Probe their reliance on fourth parties, and find out how they verify compliance with external regulations and internal cybersecurity standards. 

Leveraging Risk Management Platforms to Track and Monitor Fourth Party Vendors

Uncovering fourth-party relationships, monitoring fourth-party risk profiles, and tracking their security measures is admittedly challenging. But it’s not impossible when you use the right risk management solutions, such as Panorays. 

With a risk management platform like Panorays, you can gain a unified view of all your supply chain risks, extending to include fourth and even Nth parties. Advanced technology makes it possible to monitor cybersecurity, risk exposure, and data protection for every fourth party, giving crucial visibility into supply chain risks. 

Hold Third Parties Accountable for Their Subcontractors’ Practices

Your third parties are the critical link between your organization and your fourth parties, so you should make use of them to improve risk management. It’s tricky to impose requirements on fourth parties, but you can and should mandate third parties to place obligations on their third parties. 

When you write contracts with new vendors and suppliers, write in clauses that require them to hold their vendors and contractors to particular standards. Specify the security, compliance, and data privacy obligations that you want them to impose on their subcontractors.

Best Practices for Financial Institutions

Alongside those solutions for fourth-party risk management, there are also best practices that financial services companies can follow to reduce fourth-party risks. The more best practices you follow, the more secure your organization will be. 

  • Implement continuous risk assessments and regular audits of your fourth-party relationships 
  • Share information about risks and threats with your third parties to build a risk-aware culture
  • Adopt advanced technology that uses AI and automation to monitor third and fourth-party risks in real time

Conducting Continuous Risk Assessments and Audits of Fourth Party Relationships

Automated tools that leverage AI and machine learning (ML), like risk assessment platforms, real-time monitoring software, and automated compliance tools, deliver the oversight you need into fourth-party risk. 

These technologies can scan and analyze vast amounts of data from fourth-party vendors, identifying potential vulnerabilities, compliance gaps, and emerging threats in real time. Automated tools can also generate detailed reports about fourth party security practices to facilitate regular audits. This helps you to actualize a proactive and comprehensive risk management strategy and swiftly detect and mitigate risks throughout the supply chain. 

Collaborating with Third Parties to Improve Transparency and Supply Chain Security

Improving risk management should be a shared concern for your entire supply chain, including third parties. Set up clear communication channels and encourage vendors and contractors to share information about emerging threats, fourth-party risks, and cybersecurity practices. 

Your third parties are more likely to cooperate if you treat them like equal partners. Be open and transparent about your own security measures, and be generous in sharing threat intelligence. In this way, you can build a collaborative ecosystem that strengthens cybersecurity and operational resilience for everyone in your supply chain. 

Incorporating Automation and AI for Real-Time Monitoring of Extended Vendor Ecosystems

Finally, fourth-party risk management is extremely difficult without the help of AI and automation. AI-driven tools use machine learning algorithms to detect unusual patterns and behaviors anywhere in your supply chain, instantly flagging potential security threats and compliance issues.

When you automate the monitoring process, you can keep a constant eye over your fourth and Nth parties. You’ll have early warnings about suspicious behavior, so you can act quickly to mitigate incidents before they escalate. 

Fourth-Party Risk in the Financial Services Industry

Fourth parties can pose serious risks to your cybersecurity, data privacy, regulatory compliance, operational continuity, and business reputation. At a time when consumer expectations are growing, regulations keep increasing, and cyber-attacks are mushrooming, you can’t afford to ignore fourth-party risk. It’s a vital plank in any robust cybersecurity strategy, especially for financial services companies under high scrutiny from regulatory authorities. 

You don’t want to wait until a fourth party causes a data breach or disrupts your operations. Extend proactive risk management strategies to your fourth and Nth parties before anything escalates into a serious incident. It’s the best way to reduce fourth-party vulnerabilities and defend your attack surface. 

Panorays is here to help. It offers AI-powered security questionnaires that streamline vendor onboarding, making it easy to incorporate fourth-party risk assessments into your due diligence processes. 

The solution maps your entire supply chain to ensure that you’re aware of every fourth party that could pose a risk, considers factors like access to data and criticality to business operations, and delivers a dynamic Risk DNA score so you can prioritize risk mitigation efforts where they are most needed. What’s more, it effectively monitors all your third, fourth, and Nth parties, providing real-time insights into changing risk profiles and emerging threats. 

Ready to take control of fourth-party risk management? Contact Panorays to learn more.

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