Ask the Guru: Vendor vs. Service Provider

Hey Guru
I recently had an FDIC examiner tell me that we needed to make a better distinction between a vendor and a service provider.  His point seemed to be that by lumping them together in our vendor management program we were “over-analyzing” them.  He suggested that we should be focused instead only on those few key providers that pose the greatest risk of identity theft.  Our approach has always been to assess each and every vendor.  Is this a new approach?

I don’t think so, although I think I know where the examiner is coming from on the vendor vs. service provider distinction.  First of all, let’s understand what is meant by a “service provider”.  The traditional definition of a service provider was one who provided services subject to the Bank Service Company Act (BSCA), which dates back to 1962.  As defined in Section 3 of the Act, these services include:

“…check and deposit sorting and posting, computation and posting of interest and other credits and charges, preparation and mailing of checks, statements, notices, and similar items, or any other clerical, bookkeeping, accounting, statistical, or similar functions performed for a depository institution.”

But lately the definition has expanded way beyond the BSCA, and today almost anything you can outsource can conceivably be provided by a “service provider”.  In fact according to the FDIC, the products and services provided can vary widely:

“…core processing; information and transaction processing and settlement activities that support banking functions such as lending, deposit-taking, funds transfer, fiduciary, or trading activities; Internet-related services; security monitoring; systems development and maintenance; aggregation services; digital certification services, and call centers.”

Furthermore, in a 2010 interview with BankInfoSecurity, Don Saxinger (Team Lead – IT and Operations Risk at FDIC) said this regarding what constitutes a service provider:

“We are not always so sure ourselves, to be quite honest…but, in general, I would look at it from a banking function perspective. If this is a function of the bank, where somebody is performing some service for you that is a banking function or a decision-making function, including your operations and your technology and you have outsourced it, then yes, that would be a technology service that is (BSCA) reportable.”

Finally, the Federal Reserve defines a service provider as:

“… any party, whether affiliated or not, that is permitted access to a financial institution’s customer information through the provision of services directly to the institution.   For example, a processor that directly obtains, processes, stores, or transmits customer information on an institution’s behalf is its service provider.  Similarly, an attorney, accountant, or consultant who performs services for a financial institution and has access to customer information is a service provider for the institution.”

And in their Guidance on Managing Outsourcing Risk

“Service providers is broadly defined to include all entities that have entered into a contractural relationship with a financial insitiution to provide business functions or activities”

So access to customer information seems to be the common thread, not necessarily the services provided.  Clearly the regulators have an expanded view of a “service provider”, and so should you.  Keep doing what you’re doing.  Run all providers through the same risk-ranking formula, and go from there!

One last thought…don’t get confused by different terms.  According the the FDIC as far back as 2001, other terms synonymous with “service providers” include vendors, subcontractors, external service provider (ESPs) and outsourcers.

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