Banks Tap AI to Navigate Regulatory Maze of Managing Vendor Contracts

Michael Berman, CEO of Ncontracts, told PYMNTS that financial institutions (FIs) are grappling with the increasing burdens of vendor lifecycle management.

There can be what Berman termed “dire consequences” for FIs as they navigate contract management with their vendors. With the explosion of technology and digital channels, FIs are interacting with consumers and other clients in ways that had never been anticipated.

And as FIs work with vendors to get the services and technologies and compliance in place, to meet customer expectations, “the number of agreements have exploded — and the challenges have exploded.”

Even a small FI, he said, must hammer out as many as 300 agreements with vendors (FinTechs among them), a tally that stretches out into the thousands for larger banks. Federal laws governing compliance are constantly changing too. For FIs, there’s the challenge of knowing whether their agreements are up to date, whether they’re protected, and whether the vendors are notifying their FI partners in timely fashion about cyber-risk related events.

To get a sense of the scope and complexity of vendor management, consider the fact that, as Berman noted, joint guidance from the FDIC, OCC and Federal Reserve lists 17 items about contractual controls that govern third-party vendor relationships.

Complexity reigns, then, and can create friction, Berman said. FIs must invest significant resources in forging relationships with FinTechs before an agreement is even struck, then invest resources in the contractual process, and even invest resources when offloading that vendor in the event a contract is terminated. Armies of attorneys, databases, untold employee hours are spent grappling with legal minutiae.

“You’re either taking a lot of risks,” he told PYMNTS, “because you don’t have the legal resources to spend. Or you’re spending money on legal resources that you could be spending elsewhere if you had the appropriate technology in place.”

Harnessing the Power of AI

That technology, he said, can and should include artificial intelligence (AI), which can be harnessed to address those pain points. AI, through the use of large language models, can take in significant swathes of data and understand what words actually mean.

Ncontracts, which provides risk management and compliance software to thousands of FIs, mortgage firms and FinTechs, has rolled out its AI-powered contract management tool that helps recognize what “good” business continuity language looks like and what strong data notification language looks like. AI, Berman said, automates those functions and becomes a first line of contract management.

In terms of the mechanics, Berman said that AI “allows us to take an agreement that may just be a PDF … and we use optical character recognition to take the words off the page so that the system can understand what those words mean. And then we use our AI model to help us link all of that information so that the system really understands what that agreement means.”

The models also allow for a deeper understanding of nuance, such as when the agreements come up for renewal, what type of notice provision is required, what the pricing structure might look like over time, and how audits might be performed.

Language that is missing or which needs to be improved is flagged with red or yellow alerts so that remediation measures can be taken.

Though the AI-underpinned contract assistant tool launched only about a week ago, Berman told PYMNTS that the response from FI and Ncontracts clients has been strong, and more than 100 demos have been booked.

“AI,” Berman told PYMNTS, “is going to allow us to address risk and compliance in a much more efficient way than we’ve ever been able to do before.”