Why redundancy is critical when building a Fintech
By Daniel Cronin, co-founder of Integrated Finance
In today’s rapidly evolving fintech landscape, redundancy and resilience are critical to growing and staying alive as a business. Redundancy provides companies with alternative options when faced with unexpected challenges, while resilience ensures that their existing infrastructure can withstand and recover from disruptions. Redundancy is “Plan B”; in good times, this means having the best offers from multiple sources so that a fintech can maximize efficiency and performance. In bad times, redundancy becomes a matter of survival. If a business relies solely on one supplier (eg a banking partner) for its critical infrastructure and that supplier fails, the business will suffer. However, having multiple suppliers ensures that a business can survive, even if the transition is painful.
The need for APIs
Redundancy becomes even more critical when you consider the proliferation of APIs in the fintech industry and how many fintechs now rely solely on these APIs to communicate with vendors. Originally, banks developed the SWIFT message format as a collaboration to facilitate cross-border transactions, and this standard allowed them to serve customers more efficiently and profitably. However, as technology advanced and the cost of starting fintech came down, banks started creating their own custom APIs, giving rise to a new layer called Banking as a Service (BaaS). This new BaaS layer connects fintechs with banks, enabling them to improve existing banking solutions and provide better experiences to customers in different jurisdictions. However, the rise of BaaS has led to a deterioration of the standardization provided by SWIFT, as BaaS providers compete with each other, often considering their unique APIs as a competitive advantage.
The lack of standardization in the BaaS layer presents challenges for both companies and customers, as they become increasingly dependent on these unique APIs. In the past, learning the SWIFT standard would have been sufficient for a company looking to expand globally; with the current state of BaaS, businesses now have to adapt to multiple, distinct APIs if they want to change banking partners or expand into different markets.
Interdependencies are everywhere
Financial services operate within a chain effect, with central banks, commercial banks and fintechs forming a network of interdependence. When one link in the chain is disrupted, the entire system can be affected. There are obvious examples; if a central bank that provides liquidity goes under, then the commercial banks that finance the fintechs will suffer. However, there are also associated risks; fintechs are particularly vulnerable to risks beyond their direct control, such as the actions of other fintechs in the same ecosystem. When peers behave irresponsibly, fail to manage risk, or fail to follow anti-money laundering (AML) or Know Your Customer (KYC) protocols, the entire industry can suffer. A commercial bank may find the industry too risky and cut ties with fintechs, creating a domino effect that could lead to the bankruptcy of other companies.
To mitigate these risks, fintechs must not only comply with AML and KYC regulations, but also have contingency plans in place. These plans should always include options—redundancies—in case their business bank fails or the risk in their network becomes too great.
The importance of terminations
Building in redundancy early is critical for fintechs as it allows them to adapt to growth and adapt to changes in the market. While the pressure to reach a minimum viable product can lead to cutting corners, it is important to invest time in considering the technical implications of working with multiple vendors. It is important to carefully plan and build systems, and effectively train staff to migrate customers and manage customer data across multiple banks. This foresight is becoming increasingly critical as fintech experiences rapid growth, making it challenging to retroactively address these concerns.
Fintech infrastructure technology can play a critical role in ensuring redundancy and resilience. Orchestrators, such as Integrated Finance, can provide access to a wider range of banking services, reducing reliance on a single data layer. This connectivity helps protect businesses from disruptions, such as bugs in the code, changes at either end of the pipe, or a bank deciding to shut down a fintech access. There is also the added benefit of being able to leverage the core competencies of multiple vendors, rather than choosing a “one-stop shop” that tries to fulfill every function on average.
Only by integrating APIs and fostering collaboration between BaaS providers to focus on tackling key issues such as AML and KYC checks can the fintech industry create a safer, more efficient and more robust infrastructure for businesses and consumers alike.
