Reputation risk occurs when negative publicity regarding an institution's business practices leads to a loss of revenue or litigation. For retail payment-related systems, reputation risk is linked to consumer expectations regarding the delivery of retail payment services, and the institution's ability to meet its regulatory and consumer protection obligations related to those services. An institution's reputation, particularly the trust afforded it by customers and counterparties can be irrevocably tarnished due to perceived or real breaches in its ability to conduct business securely and responsibly.
Financial institutions are responsible for risks associated with the activities of third-party service providers with which they contract. Deficiencies in security and privacy policies that result in the release of customer information by a service provider can damage the reputation of client financial institutions. Operational failures could significantly impact an institution's reputation if systems are disrupted for extended periods. Management oversight of third-party service providers is a critical component of reputation risk management.