Vendor Data Sharing: Why “Need to Know” Is a Must for Financial Institutions

Vendors play a crucial role in helping financial institutions deliver modern, efficient, and client-focused services. But with every data exchange comes risk, and data minimization should always guide your institution’s approach to vendor management.

Data minimization means sharing only the information a vendor needs to perform the specific service they’re contracted to provide — nothing more, nothing less.

For example:

• A marketing firm designing a new campaign might need access to anonymized demographic data such as ZIP codes or client age ranges, but they should never receive full social security numbers, dates of birth, or account numbers.
• An IT vendor supporting your systems may need system access credentials or log files, but not personal client non-public information.

It’s important to remember that every unnecessary data point shared increases your exposure to data breaches, compliance violations, and reputational harm.

Regulators have made it clear that when you outsource a service, you cannot outsource the risk. Financial institutions remain responsible for safeguarding all client information under guidance, such as:

• Gramm-Leach-Bliley Act (GLBA) and its Safeguards Rule
• FFIEC Guidance on Outsourcing Technology Services
• FDIC, OCC, and NCUA vendor management requirements

Regulators expect financial institutions to:

• Conduct due diligence on all vendors;
• Establish clear data handling and security expectations in contracts;
• Limit vendor access strictly to the information required for their role; and
• Monitor vendors’ compliance with data protection obligations.

Not all vendors present the same level of risk, and due diligence should reflect that. Each vendor relationship should be evaluated through a structured risk analysis.

Steps should include, but are not limited to:

1. Identifying the type of data the vendor must have access to provide service.  — client PII, financial data, system credentials, or only anonymized information.
2. Assessing the vendor’s control environment — reviewing their cybersecurity practices, incident response plans, and compliance with applicable standards (e.g., SOC 2).
3. Considering the potential impact of a data breach or service interruption, could it expose sensitive data, disrupt operations, or harm the client?
4. Categorizing vendors by risk level (e.g., high, medium, low) and adjusting oversight accordingly.
5. Documenting your analysis — regulators expect a clear record of how you evaluated a vendor’s risk and data access needs.

Performing a risk analysis helps to ensure that data sharing decisions are intentional, defensible, and in line with your institution’s risk appetite.

By applying data minimization across all vendor relationships, financial institutions can significantly reduce risk, protect their clients, protect their reputation, and protect their regulatory standing.