Oh My! Understanding the Bank Vendor Management Environment and Virtual Currencies

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1 Oh My! Understanding the Bank Vendor Management Environment and Virtual Currencies Douglas King, Payments Risk Expert Federal Reserve Bank of Atlanta

2 2

3 OH MY! UNDERSTANDING THE BANK VENDOR MANAGEMENT ENVIRONMENT & VIRTUAL CURRENCIES Agenda The Retail Payments Risk Forum The Current Risk Environment for Financial Institutions Bank Vendor Management A Bit on Crypto-currencies Q&A 3

4 THE VIEWS EXPRESSED IN THIS PRESENTATION ARE THOSE OF THE PRESENTER AND DO NOT NECESSARILY REFLECT THE VIEWS OF THE FEDERAL RESERVE BANK OF ATLANTA OR THE FEDERAL RESERVE SYSTEM.

5 THE RETAIL PAYMENTS RISK FORUM

6 A CATALYST FOR COLLABORATION 6

7 THE CURRENT RISK ENVIRONMENT FOR FINANCIAL INSTITUTIONS

8 THE BANKING INDUSTRY S CURRENT RISK ENVIRONMENT 8

9 WHY SUCH AN EMPAHSIS ON VENDOR RISK MANAGEMENT? 9

10 HAS IT LEFT YOU FEELING LIKE THIS? 10

11 BANK VENDOR MANAGEMENT

12 WHAT CONSTITUTES A VENDOR (THIRD-PARTY)? [A]ny person that provides a material service to a covered person and any business arrangement between a bank and another entity. 1 Payment processing Website and software vendors Appraisal management Document and disclosure vendors Loan brokers Attorneys Contract underwriters 1 Dodd-Frank Act and OCC Bulletin

13 WHAT CONSTITUTES A SIGNIFICANT VENDOR (THIRD- PARTY) RELATIONSHIP? TP performs critical functions TP stores, access, transmits, or performs transactions with sensitive customer information Performs a service involving lending or card payment transactions Poses risks that could affect earnings, capital, or reputation Provides product or service that covers large number of consumers Provides product or service that implicates higher risk consumer protection regulations Relationship is new or involves new FI activities Has material effect on FI s revenues or expenses Increases FI s geographic market Involves deposit taking arrangements Markets products directly to FI customers that could pose risk of financial loss to individual 13

14 THE RISKS ASSOCIATED WITH VENDOR RELATIONSHIPS Strategic: Reputational: Operational Transactional: Financial: Compliance: Foreign: Adverse business impact Negative public opinion Failed internal processes, people or systems Problems with service or product delivery Unable to meet contractual arrangements Violations of laws, regulations or internal policies Country, culture, or geopolitical 14

15 THE ELEMENTS OF A VENDOR RISK MANAGEMENT LIFE CYCLE PROGRAM Planning and risk assessment Due diligence and selection Contract negotiation and implementation Oversight and ongoing monitoring Business continuity and contingency plans 15

16 WHAT DOES THIS MEAN FOR VENDORS? Vendors need to implement a written compliance management system that includes the following elements (not an exhaustive list): Hire and maintain a compliance officer and needed staff Identify and comply with all applicable consumer protection laws Understand the products and services outsourced by the bank and review related marketing materials Conduct onsite due diligence visits to all material sub-service providers Maintain records demonstrating compliance with service level standards in any material contracts with banks Procedures to promptly notify the bank of significant regulatory inquiries or consumer complaints 16

17 WHAT CAN THE CONSEQUENCES BE? 17

18 THERE ARE ALSO NON-MONETARY CONSEQUENCES 18

19 A BIT ON VIRTUAL CURRENCIES

20 DIGITAL CURRENCIES CAN BE ELECTRONIC OR VIRTUAL Digital Currencies Electronic Virtual 20

21 DIGITAL CURRENCIES AREN T NEW Fiat currency is government-issued currency declared to be legal tender and has physical attributes Electronic currency is pegged to a fiat currency Digital representation of value that is government-issued legal tender The link between electronic currency and the fiat currency is preserved and has a legal foundation The stored funds are expressed in the same unit of account (e.g. U.S. dollar, euro, etc.) Virtual currency is not pegged to a traditional fiat currency Digital representation of value that is not government-issued legal tender The unit of account (e.g. U.S. dollar) is changed into a virtual one (e.g. bitcoins) Unregulated currency that is issued and usually controlled by its developers 21

22 THE NUMBER OF VIRTUAL CURRENCIES GROWS DAILY 22

23 A FEW MUSINGS ON VIRTUAL CURRENCIES Bitcoin and other virtual currencies are currently just a blip on the payments spectrum More promise as a payments system than a currency Consumer adoption is hampered by a lack of protections and difficulty of obtaining currency The regulatory environment still needs time to mature As the virtual currency regulatory environment evolves, will their benefits remain? The public ledger (blockchain) has potential benefits beyond payments 23

24 THANK YOU Douglas King

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