The necessity of redundancy and resilience for fintechs and enterprises

Redundancy and resilience are critical components to develop within organisations, they ensure the continued operation of businesses, and provide with the ability to maximise efficiency and improve performance as you scale your business.

In this article, we'll take a look at the importance of resilience and redundancy in the financial sector, how to identify risk to redundancy and how to protect your organisation.

Redundancy in the financial supply chain

Firstly, let's define redundancy.

In a nutshell, redundancy is about having a Plan B to eliminate a single point of business failure.

For example, you can have more than one service provider for critical services, and you use two different commercial banks for a single geographical location, even though you may only ever use one of them – the second exists in case there is a catastrophic failure of the first.

Redundancy is also about leveraging strengths of banking providers and other Fintech ecosystem players to extend and maximise your product offering.

Why is redundancy important? The financial daisy-chain

In the financial sector, it is possible to have your own company fail due to exposure to other entities in your network. This is due to the daisy-chain effect, with central banks, commercial banks and financial institutions, all forming a network of interdependencies.

At the top of the chain are central banks that offer banking services to the alternative banking ecosystem. Underneath are the commercial banks, which have access to large pools of liquidity and offer their services to businesses and the general public.

And, finally, underneath those are fintechs and enterprises who are exposed to other organisations on the chain that may not be keeping up with fiduciary activities. For example, Anti-money laundering duties (AML), or accidentally assisting with illegal money movement activities. If a commercial bank decides that they will no longer support your sector – due to other companies being bad actors – you become collateral damage.

Steps to identifying risks to redundancy/resilience

No business is the same, and identifying risks to redundancy can be tricky - especially when you consider the proliferation of APIs and how many businesses rely solely on these APIs to communicate with suppliers to deliver critical services to their end users.

Those dependencies start at the higher level of the supply chain - for example with BaaS - and are often caused by a lack of standardisation across the entire financial technology ecosystem.

In Europe the situation is more fragmented, with different BaaS pairs connecting to tier-one and tier-two banks, and sometimes even directly to payment schemes. This means, each connection has its own unique set of APIs which dissolve standardisation all together, increase business dependencies further, and increase redundancy risk.

But, just because your Fintech product is built on top of highly dependable third-party APIs does not mean you are not able to firstly, identify risk and ultimately, mitigate redundancy risk.

There are several ways to ensure this and the following are some key steps to help identify these risks:

1. Understand your own risk exposure and act accordingly

Financial services businesses need to assess how much risk they expose their banking supplier to, and be willing to make adjustments where required.

By having thorough KYC procedures, you can prevent money laundering and limit fraud due to a user hiding their identity. Make no mistake, if you lack adequate Know Your Customer (KYC) procedures, you pose a risk to your banking supplier.
You can prevent money laundering and limit fraud due to a user hiding their identity. This will limit your business' exposure to criminal activities, which in turn reduces your risk. Being able to identify a user’s financial history and previous assets owned also helps you form risk assessments to gauge your risk appetite further. In addition, by obeying AML laws, you make your business stable and more trustworthy to banking partners - which could also encourage investment.

Lastly, the decreased uncertainty in your business can also entice more customers and increase your profits.

When players in the ecosystem behave irresponsibly the entire industry can suffer as a result. A commercial bank may decide that the industry is too risky and sever ties with alternative banking providers and fintechs, creating a domino effect that could lead to the debanking of other companies.

2. Assess your potential failure areas and costs associated with implement a Plan B

In order to mitigate the risk of potential failures, businesses should evaluate which aspects of their critical infrastructure are being managed by a single provider and consider the potential consequences if any of these components were to fail. For example, if a business heavily relies on a single ‘router’ for all of its transactions, a disruption at this endpoint could be catastrophic and potentially lead to the downfall of the entire enterprise.

It is useful to think about mitigating potential failure areas as your insurance policy when that single point of failure event takes place.

Admittedly, paying for something in the case of… isn’t the easiest pill to swallow, especially when funds are tight, as it often is the case for SMEs.

Often, development time and costs deter decision makers from implementing a Plan B. Having another provider means another integration to build, and possibly development time away from product enhancements.

The solution? a set of pre-built banking integration(s) and standardised fintech APIs operating in non-active mode alongside your active provider(s).

3. Consider the exposure of horizontal organisations

It is crucial to identify the risks that exist horizontally within the lower layers of the supply chain ecosystem. This feeds into our previous examples of lack of security and compliance procedures, unwittingly or otherwise, leading to a commercial bank relegating/impacting an entire sector.

Three months ago you might have thought that this sounds like a bit of a doomsday scenario, and folks at Integrated Finance need to take a chill pill. However, the global financial landscape has seen a lot of change in the few quarters since, from the FCA’s Dear CEO letter, to further regulations imposed on Solarisbank, to the collapse of Silicon Valley Bank.

It is important to not ignore the looming regulatory change and other economic aspects that could create the conditions for the perfect storm.

Creating a universally accepted communication protocol

As each bank on the SWIFT network has started building its own bespoke APIs, an emergent layer called Banking as a Service (BaaS) has been created. This layer enables fintechs and enterprises to give customers a better experience using modern banking technology.

However, the SWIFT layer that once standardised everything is slowly being dissolved because of the new emergent layer, and all BaaS providers are competitors to each other. There hasn't been an incentive to standardise, and most BaaS providers view their APIs as a competitive advantage over their competitors.

To remedy this, the financial services industry needs a common infrastructure.

Standardised Fintech infrastructure technology can play a crucial role in ensuring redundancy resilience. At Integrated Finance, we are a proponent of standardising access to banking providers reducing dependency on a single data layer. This connected access helps protect fintechs and enterprises from disruptions, changes to third-party APIs, or a banking provider turning off a fintech’s access.

Talk to our experts to find out more about our redundancy and resilience packages.