" class="no-js "lang="en-US"> Why Redundancy is Critical When Building a Fintech
Sunday, April 21, 2024

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 businesses with alternative options when faced with unexpected challenges, while resilience ensures that their existing infrastructure can withstand and recover from disruptions. Redundancy is the “Plan B”; in good times, this translates to having the best offerings from multiple sources, allowing a fintech to maximise efficiency and performance. In bad times, redundancy becomes a matter of survival. If a business relies solely on one supplier (e.g. 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 suppliers. Originally, banks developed the SWIFT messaging format as a cooperative effort 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 fintechs decreased, banks began creating their own bespoke APIs, giving rise to a new layer called Banking as a Service (BaaS). This new BaaS layer connects fintechs with banks, allowing them to improve upon existing banking solutions and provide better experiences to customers in various jurisdictions. However, the emergence of BaaS has led to the deterioration of the standardisation provided by SWIFT, as BaaS providers compete with one another, often considering their unique APIs as a competitive advantage.

The lack of standardisation in the BaaS layer poses challenges for businesses and customers alike, as they become increasingly dependent on these unique APIs. In the past, learning the SWIFT standard would have sufficed for a company looking to expand globally; with the current state of BaaS, businesses must now adapt to multiple, distinct APIs if they wish to switch banking partners or expand into different markets.

Interdependencies are everywhere

Financial services operate within a daisy chain effect, with central banks, commercial banks, and fintechs forming a network of interdependencies. 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 is also associated risk; fintechs are particularly vulnerable to risks outside their direct control, such as the actions of other fintechs in the same ecosystem. When peers behave irresponsibly, fail to manage risk, or do not follow anti-money laundering (AML) or Know Your Customer (KYC) protocols, the entire industry can suffer. A commercial bank may decide that the industry is too risky and sever ties with fintechs, creating a domino effect that could lead to the debanking of other companies.

To mitigate these risks, fintechs must not only adhere to AML and KYC regulations but also have contingency plans in place. These plans should always include alternatives – redundancies – in the event their commercial bank fails or the risks within their network become too great.

The importance of redundancies

Building in redundancy early is crucial for fintechs, as it allows them to accommodate growth and adapt to changes in the market. While the pressure to reach a minimum viable product can lead to cutting corners, it is essential to invest time in considering the technical implications of working with multiple suppliers. It is essential to carefully plan and build systems, and train staff effectively so they can migrate customers and manage customer data across multiple banks. This foresight becomes increasingly critical as fintech experiences rapid growth, making it challenging to address these concerns retroactively.

Fintech infrastructure technology can play a crucial role in ensuring redundancy and resilience. Orchestrators, like Integrated Finance, can provide access to a wider range of banking services, reducing dependency on a single data layer. This connectivity helps protect businesses from disruptions, such as bugs in the code, changes on either end of the pipe, or a bank deciding to turn off a fintech’s access. There is also the added benefit of being able to leverage the core competencies of multiple providers, rather than choosing a “one-stop shop” that tries to fulfil every function averagely.

Only by integrating APIs and fostering collaboration among BaaS providers to focus on tackling key issues such as AML and KYC checks, can the fintech industry create a more secure, efficient, and resilient infrastructure for businesses and consumers alike.

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