Lessons in Risk Management: Key Takeaways from the CFPB's Consent Order Against VyStar Credit Union

The recent consent order issued by the CFPB against VyStar Credit Union is a wake-up call (AGAIN ??) for fintech and financial institutions about the importance of managing operational risks, carefully selecting vendors, and prioritizing customer protection. VyStar's experience with a poorly managed digital platform upgrade highlights the need for strong governance frameworks and reliable contingency plans when rolling out new technology in financial services.

Let's break this down and do a quick analysis and what are the key lessons.

1. Vendor Selection and Due Diligence

VyStar’s problems stemmed from inadequate vetting of its vendor, who lacked the experience needed for a major digital conversion. This situation underscores the importance of thorough vendor assessments, especially when introducing complex platforms. Financial institutions must conduct standardized checks and evaluate vendors’ histories with similar projects - Checkout Coverbase to help with this control and oversight.

2. Project Management and Governance

VyStar’s rushed timeline and lack of project safeguards led to overlooked red flags and quality issues. Effective governance means setting clear project boundaries and accountability at every phase. This requires experienced project managers, compliance officers, and technical experts to guide decision-making and establish “go/no-go” checkpoints based on rigorous testing - Implement in a robust GRC tool. Checkout LogicGate

3. Testing Protocols and Rollout Phases

VyStar’s inadequate testing, including not simulating real-world transaction loads, was a costly oversight. Financial institutions should prioritize extensive load and pilot testing with a subset of users before full deployment. A phased rollout allows for problem-solving before the entire customer base is affected.

4. Contingency Planning and Resilience

By disabling its legacy system, VyStar left itself with no fallback. Institutions should ensure contingency measures like keeping the legacy system accessible or establishing disaster recovery protocols. Having a rollback plan can prevent prolonged disruptions if new systems fail.

5. Customer Communication and Support Infrastructure

The platform’s failure, long wait times, and customer frustration show the need for strong communication channels. Transparency is essential during transitions, with regular updates and alternative access channels for customers. Increasing customer service resources during transitions can also help manage higher service demands.

6. Accountability and Board Oversight

In VyStar’s case, limited board involvement in risk oversight contributed to the failure. Regular board updates on major projects, especially those impacting customers, are crucial. Holding executives accountable aligns project goals with customer protection and fosters a culture of responsibility.

???? Actions for Fintech and Financial Institutions

To avoid similar issues, institutions should take a proactive approach to technology upgrades:

Comprehensive Risk Management

Develop a clear risk framework that includes assessing project risks, potential consumer impacts, and the financial costs of failures. Regular risk assessments and mitigation strategies are key.

Vendor Management Policies

Implement strict vendor selection and monitoring policies to ensure reliable partnerships and measure performance with clear benchmarks. Reviewing vendor contracts can also protect institutions if vendors underperform.

Cross-Functional Oversight Committees

Form committees with experts from compliance, risk, technology, and customer service to oversee major tech implementations. Regular reports to the board maintain transparency and enable strategic oversight.

User-Centric Transition Plans

Make the customer experience a priority during technology upgrades. Effective communication, support, and empathy are essential in handling issues. This approach can help minimize reputational and regulatory risks by demonstrating a commitment to customer care.

?? Parting Thoughts

VyStar’s experience is a reminder for fintechs and financial institutions that compliance and customer trust are interconnected. By integrating these lessons, institutions can build resilient digital platforms that elevate service quality while protecting against operational and reputational risks.

Disclaimer: The information provided above consists of recommendations and opinions only. Please consult with your legal counsel for advice on any legal and compliance matters.

Stay compliant and stay ahead, folks! ???

Best,

DG