In the constantly evolving landscape of Fintech, infrastructure and integrations plays a crucial role. Whether it's about connecting to different banking providers, staying on top of KYC or AML, or orchestrating complex funds flows - the way you choose to connect with different financial technology providers will have significant implications on the cost and quality of your service, as well as your time to market and ability to scale operations.
Traditionally, the process of connecting multiple providers across the unbundled embedded banking stack involved months of build time with high development and infrastructure costs. Today, an alternative technology exists which provides a cost, time and technological advantage.
Understanding the basics: APIs vs custom connectivity
APIs, or Application Programming Interfaces, act as intermediaries allowing two applications to communicate with each other in a common language. APIs can facilitate workflow-enabled actions like making payments, accessing transaction history, or confirming account balances with your banking partners. In the context of modern Fintech infrastructure technology, financial APIs have emerged as vital tools to consume and extract value from SaaS through reduced workload for in-house teams, allowing companies to focus on core activities.
On the other hand, custom connectivity solutions involve building integrations to banking, finance and compliance systems, built from the ground up. While this approach offers a degree of customisation, it is often resource-intensive, time intensive and requires constant inhouse maintenance for each connection you build.
Identifying your project development aims and objectives
Determining whether to adopt an integrated services Fintech infrastructure or embark on a custom connectivity project primarily depends on your strategic objectives.
Businesses tackling this endeavour need to understand that there is not a one-size-fits all solution, and weighing the costs and benefits of each solution for the specific problem you are looking to address is the key to answering your needs.
The various costs to consider
A rigorous cost analysis should encompass more than just the immediate price tag. Mistakenly, often more emphasis is placed on the initial (per) integration setup costs. Ongoing development costs of maintaining financial systems do not always form part of the overall cost-benefit analysis criterion.
API enabled integrated services pricing models usually involve subscription or usage-based costs. However, compared to the development, maintenance, and operational costs associated with custom-built solutions, integrated service solutions generally have a lower total direct cost.
When building your custom banking connection, a team of up to 5 inhouse developers in various roles can be required, easily totalling an overhead north of £400,000. Integrated services infrastructure however, requires a far simpler setup cost, with a maximum of two resources to build the same scale of service, saving hundreds of thousands of pounds.
Indirect costs with custom connectivity can escalate quickly. The system requires constant attention and nurturing from skilled personnel, which may need to be hired or upskilled, resulting in the additional financial burden of training. Some businesses can easily see this rise up to 25% of their total operating costs. Then, there are the costs associated with system downtime, which can impact business operations and potentially lead to a loss in revenue or customer trust.
In contrast, integrated services, managed by experienced Fintech infrastructure providers, free up your internal resources thus, leading to fewer indirect costs. Such services should also offer fully redundant stacks, ensuring seamless operations and protecting your brand.
The intangible costs associated with custom connectivity can be significant. Delays in the development cycle may lead to missed market opportunities and a potential erosion of your competitive advantage. By contrast, financial APIs can be standardised across multi-providers and utilised as a common Fintech infrastructure with ready-to-deploy, pre-built integrations. This provides agility in market response, fostering a proactive rather than a reactive business strategy.
The order of magnitude of this could be between 6 weeks and 6 months in the case of Integrated Finance’s Fintech infrastructure stack.
Custom integrations often demand the full attention of your resources, diverting them from more value-adding tasks. Especially when the connectivity developed is simply for foundational operational purposes; these resources might be better utilised in enhancing unique features or differentiating your product in the market. The streamlined, plug-and-play nature of financial APIs liberates these resources, enabling their deployment for strategic initiatives that directly impact your competitive standing and bottom line.
The world of financial services is characterised by stringent regulations and fierce competition. Every change in regulation or competitive play requires system adjustments. With custom integrations, the burden of keeping up with these changes falls on your shoulders. This can result in constant monitoring and frequent system overhauls – another source of potential risk costs. Conversely, financial APIs built by seasoned Fintech infrastructure providers ensure compatibility with third party banking providers, and compliance with the latest regulations. In addition, these pre-built connections are regularly updated to address evolving market trends, thereby drastically reducing risk and potential costs associated with this.
Lastly, the risk of service resilience is greater with custom-built integrations as opposed to API enabled integrated services. Standardised Fintech infrastructure technology reduces dependency on a single data layer to help fintechs protect themselves from any service disruptions, changes to third-party APIs and or a banking provider turning off a fintech’s access.
Benefit-Cost Ratio (BCR) and its application in the build vs buy dilemma
The Benefit-Cost Ratio (BCR) is a financial metric that quantifies the relationship between the benefits gained and the costs incurred in an investment or project. It helps assess the desirability of a given option. In the context of connectivity with banking services, applying the BCR to API-based integrated services compared to custom-built integration connectivity reveals the relative benefits and costs.
With subscription or usage-based fees, financial API enabled integrations have lower direct costs versus custom solutions. They also require fewer additional resources, support staff, and entail less potential downtime, resulting in lower indirect costs. Furthermore, the faster integration of financial APIs' enables advantages in time-to-market and reduces intangible costs such as delays and missed opportunities. By freeing up resources for other strategic initiatives, integrated services have lower opportunity costs compared to custom-built solutions. Lastly, financial APIs built by experienced providers mitigate regulatory and competitive risks.
Taking these factors into account, API-first Fintech infrastructure technology solutions generally offer a higher BCR compared to custom-built connectivity. Alongside the speed, scalability, and ongoing innovation associated with standardised financial APIs, they emerge as the clear winner in the build vs buy dilemma for connectivity with various third-party financial service providers.
Despite their utility, metrics such as BCR shouldn't be the only factor driving the decision. They are just one tool in the larger financial decision-making toolkit and have their limitations. For instance, they might not fully capture some intangible benefits or costs, like increased customer satisfaction from improved services or reduced customer satisfaction as a result of core service disruptions.
Solving the dilemma
The decision between building custom bank connectivity and leveraging financial APIs is not a straightforward one, but a complex choice that must be informed by a thorough understanding of your strategic objectives, market dynamics, internal capabilities, and both direct and indirect costs. Nevertheless, our analysis suggests that, in many cases, Fintech infrastructure emerge as a more cost-effective and efficient solution, enabling quicker deployment, seamless scaling, and agile market response.
While financial APIs may not offer the high level of customisation afforded by bespoke connections, they excel in terms of cost efficiency, time to market, scalability, and risk management. The higher BCR for financial APIs, combined with lower direct and indirect costs, makes them a compelling choice for businesses seeking to optimise their resources and maintain a competitive edge in the rapidly evolving Fintech landscape.
Ultimately, the choice between custom digital banking connectivity and financial APIs should be guided by a clear-eyed assessment of your unique needs, objectives, and constraints. Adopting a strategic and well-informed approach to this crucial decision can help your business thrive in the dynamic, challenging, and opportunity-rich world of Fintech.
Making sure each supplier can deliver what you need via a channel that works for you - given internal resource constraints - is arguably the hardest part of building and scaling your own fintech. Our fully agnostic Fintech infrastructure platform gives you access to pre-built core banking connected solutions such as accounts, cards and transactions as well as compliance and financial orchestration solutions. You and your development team no longer have to waste time building and setting up each individual connection, they can get on with the developments that add value to your business.