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CFPB Bulletin 2012-3: You Can’t Outsource Diligence

June 18, 2012
Credit|Banking_Channels
Ken Paterson
Mercator Advisory Group
As I discussed in my recent report, Small Credit Card Issuers 2012: Waiting For A Renaissance, small credit card issuers have an impressive and comprehensive array of processing and outsourcing services at their disposal. It’s not an exaggeration to say that most of the roughly 5,000 small credit card issuers owe the ongoing existence of their credit card businesses to the availability of outsourcers and their capabilities. Small issuers have justifiably come to depend on the processing, marketing, risk management, and even compliance expertise of their partners. The credit card business has become incredibly complex, and the ability to access quality outsourcing services is a critical survival factor for small issuers.

The recent Consumer Financial Protection Bureau bulletin serves as a warning to financial institutions that in spite of business complexity, you can’t outsource the diligent monitoring of your outsourcing partners. As the bulletin states, The CFPB expects supervised banks and nonbanks to have an effective process for managing risks of service provider relationships. The bulletin lists a number of responsibilities, including conducting due diligence regarding a provider’s knowledge of applicable law, their internal controls, contractual compliance expectations, ongoing monitoring, and problem resolution.

The challenge, of course, is that small issuers outsource elements of their card programs because they don’t have the expertise in-house. Increasingly, they rely on their outsourcing partners’ expertise to keep them in compliance with applicable legislation and rules (as well as fraud management, network rule compliance, competitive product features, etc., etc.).

But just as an issuer is ultimately responsible for their own credit policies and credit risk, the CFPB is reminding issuers they are ultimately responsible for the capabilities they choose to outsource, and the selection of the partners to provide them.

Being a financial institution is still a tough job, no matter what you outsource.

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