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July 30, 2012
Even an Outsourced Cloud Can Have a Silver Lining: Shedding Light on Cloud Payments Risk Management
Outsourcing is not new in financial services. Banks continue to improve their operational efficiency—and even lower their risk exposures—by engaging third-party service providers to perform specific functions they used to manage internally. Now, technological advances are enabling financial institutions and other payment providers to shift certain data management functions to the cloud, an outsourcing practice we discussed in an earlier Portals and Rails post. Cloud outsourcing provides operational cost savings to the end user community, but these new services introduce new risks in payment systems.
On July 10, 2012, the Federal Financial Institutions Examination Council (FFIEC) published a statement on cloud computing to supplement its Outsourcing Technology Services booklet. The aim of the statement is to help financial institutions better understand the fundamental risks associated with these new services and the need for robust vendor management.
Cloud computing basics
The term "cloud computing" in its most basic sense describes a service that stores and processes data on a remote network. Cloud service providers are entrusted with ensuring the security of end user data within that remote network.
A notable feature of cloud computing is its deployment model. Risk profiles may differ, making some models more appropriate for some services than others. Some models may include private clouds operated for a single organization, community clouds that are shared by several organizations, or combinations of the two for hybrid business models.
According to a recent paper authored by Dan Schutzer, chief technology officer of BITS, small devices like mobile handsets have limited storage while communications networks are becoming faster and more efficient. These factors have led to more businesses offering services that allow data to reside in remote servers, or in "the cloud." He cites public cloud examples like Flikr, which allows consumers to store photos in the cloud, and Google Docs, which allows consumers to manage documents remotely.
Risk management in cloud computing
Arguably, the data in these examples may not be as sensitive as that managed by financial institutions and others involved in payment processing. The FFIEC statement notes that as financial institutions consider a cloud computing model in their outsourcing strategies, risk management and third-party oversight to protect sensitive personal consumer data become increasingly important.
The FFIEC statement maps the key elements of risk management articulated in the existing interagency guidance. It starts with due diligence, noting that financial institutions are responsible for ensuring that third-party activity is conducted according to applicable law and regulation, just as if they bank retained those functions in-house. It also discusses the key elements to consider in ongoing vendor management and business continuity planning.
The vendor management challenge
A major takeaway for financial institutions and other payment providers is in the part of the FFIEC statement that discusses "legal, regulatory, and reputational considerations":
The nature of cloud computing may increase the complexity of compliance with applicable laws and regulations because customer data may be stored or processed overseas. A financial institution’s ability to assess compliance may be more complex and difficult in an environment where the cloud computing service provider processes and stores data overseas or comingles the financial institution’s data with data from other customers that operate under diverse legal and regulatory jurisdictions.
While the risk management fundamentals for cloud computing remain the same, the increasing complexity of the operating environment will challenge the effectiveness of vendor management programs going forward. As outsourcing relationships expand geographically, the expertise required to oversee those activities will increase as well. Furthermore, third-party service providers may have outsourced relationships themselves, requiring inclusion of those downstream oversight processes in the financial institution’s vendor management program.
The FFIEC guidance provides a good description of these risks and challenges to consider in selecting and managing a cloud computing strategy, but also notes that "cloud computing may not be appropriate for all financial institutions."
By Cynthia Merritt, assistant director of the Retail Payments Risk Forum
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- account takeovers
- ATM fraud
- bank supervision
- banks and banking
- card networks
- check fraud
- consumer fraud
- consumer protection
- cross-border wires
- data security
- debit cards
- emerging payments
- financial services
- identity theft
- law enforcement
- mobile banking
- mobile money transfer
- mobile network operator (MNO)
- mobile payments
- money laundering
- money services business (MSB)
- online banking fraud
- payments risk
- payments study
- payments systems
- phone fraud
- remotely created checks
- risk management
- Section 1073
- social networks
- third-party service provider
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- Unfair and Deceptive Acts and Practices (UDAP)
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