How banks can address supply chain risk

Fri 25 Jun 2021

Local and international trends have transformed the way banks operate, affecting their capital positions and profitability. In particular, ongoing digitalisation programmes and technological innovation continue to add pressure on traditional banking models, including the supply chain. While management’s focus on capital preservation, profitability and growth for shareholders remains, risks from an operational perspective have intensified. As a black swan event, the covid-19 pandemic highlighted the need for banks to address supply chain risk.

Identify disruption hot spots 

We live in a highly interconnected world. Increased reliance on services outsourced to global third-party vendors subject to their countries’ pandemic response procedures, coupled with an enhanced remote work environment, is likely to contribute to substantial organisational disruption. On top of the economic and governmental impacts of covid-19, the increase in cyberattacks can throw logistics into chaos.

Security is a risk management hot spot. When it comes to the supply chain, your organisation’s security posture is only as strong as its weakest link. So, if your vendors are not making the proper due diligence investments in their security programmes, then you are at risk. To mitigate and manage the risks presented by third-party vendors now and in the future, ensure contracts are reviewed periodically to include security requirements, such as indemnity and right to audit clauses. This is particularly important if you expect your vendors to protect or connect you to your sensitive information. 

Consider risk-mitigating responses

Practice the principle of least privilege by making sure permissions assigned to each vendor are configured with only the minimum access requirements for them to perform their contracted services. Perform a penetration test and require your “mission-critical” or “Tier 1” vendors to do the same to assess and manage security posture effectively, improve response time to security threats and comply with existing security regulations. 

Other risk-mitigating responses may include aligning IT systems to support evolving working arrangements. Focus on Tier 1 supplier risk by opening communication channels with key customers and conducting global scenario planning. Long-term measures are essential, and supply chain trends are emerging, such as digital supply networks (DSNs), where firms are interconnected to their supply network. This allows for optimisation, agility and end-to-end visibility. 

Adopt a forward-thinking approach

As the covid-19 pandemic continues to affect our day-to-day operations, fuelling the global financial crisis and cyberattacks, the importance of managing business disruptions and their impact on banking is increasing. To lower risk to an acceptable level, banking leaders must use tangible risk measurement metrics, effective risk-transfer tools and assess and manage their vendors’ performance through implementing third-party risk management solutions. 

It’s also essential to keep a keen eye on future risk trends when assessing present risk patterns. Significant risks that continue to challenge an organisation’s security infrastructure include insufficient preparedness for cyber threats and lack of visibility into the performance of third-party vendors. There’s also the threat to operational resilience due to restricted growth triggered by tough economic circumstances.

The economic decline in 2020 resulting from the covid-19 pandemic is a vital learning tool for deriving new risk strategies for the future. Although risk is a part of the business environment, managing it successfully by reducing threats and vulnerabilities could prove challenging. However, reducing supply chain risk is one challenge banks must now prepare to meet head-on.