Why FinTechs Need a Payment and Banking Strategy Before They Build Anything

Everyone assumes that licensed financial companies already understand how the entire system works. But this is far more complicated, and therefore it creates one of the biggest risks within the FinTech industry.

FinTechs usually provide payment accounts, wallets, acquiring, money transfers, foreign exchange, cards or other financial services, but these are only the front-end services. Behind their polished applications and enhanced user experience, FinTechs still depend on banks, correspondent banks, intermediary banks, acquirers, card schemes, safeguarding institutions, liquidity providers and various other financial partners to deliver these services.

FinTechs make a profit by buying financial services in bulk from these “financial manufacturers” and reselling them to customers with added services for a profit. But every underlying provider, banking partner, and payment route adds another layer of cost, risk, and dependency that FinTechs must understand before building anything on top of it. This is why payment and banking strategy is just as important, if not more important, than it is for regular businesses.

The Inception of Providers

Not many businesses know this, but the FinTech industry is based on reselling the resellers’ products. The majority of the underlying providers also buy the same services from another bank, acquirer or payment provider, which also buys these from somewhere else. FinTechs did not invent the wheel, but just added an extra layer of front ends to the same underlying services, packaged them nicely and marked them up. But this arrangement creates a multilayer reselling channel where every additional company introduces another fee, contract, technical connection, risk appetite and possible interruption into the movement of money.

One apparently simple transaction can travel through an orchestrator, gateway, payment provider, tool, acquirer, correspondent bank and settlement institution before the funds finally reach their destination, while every company along this route controls one part of the process and charges heavily for its part.

A FinTech serves thousands of customers while actually depending entirely on the existing financial infrastructure, which all belongs to other companies.

And this dependency needs a strategy.

FinTechs Are Customers Too

One of the biggest misconceptions about FinTechs comes from the belief that regulation, licensing and industry experience automatically give them full control over customer funds and payment routes. This could not be further from the truth.

Every financial institution operates as somebody else’s customer. Even banks need banks.

A correspondent bank has a formal banking relationship with another bank and processes payments on its behalf, while an intermediary bank helps route a specific international payment when the sending and receiving banks lack a direct relationship.

These banks create the international highways that connect financial institutions across countries, currencies and payment systems. A local bank usually maintains direct relationships with a limited number of institutions, and it needs correspondent or intermediary banks to access the wider network, which allows payments to travel around the world.

When a customer initiates an international transfer, one or several intermediary banks can facilitate communication, currency conversion, settlement and fee deductions before the recipient bank receives the funds. These institutions mainly serve other banks, which means the customer experience that appears simple at the front can depend on multiple commercial relationships operating far behind it.

Correspondent banks also provide treasury services, settlements, clearing, currency exchange and international fund transfers, which allow local institutions and FinTechs to serve customers across markets that their own licences and infrastructure could never reach directly.

This creates complex strategic questions for every FinTech: which providers support what service, at what price point, under what terms and conditions, and what happens when some of these providers change anything overnight. FinTechs still need careful planning to build contingency plans and decide on the right routing, considering possible changes and their effects.

Two Providers Can Still Mean One Route

FinTechs often celebrate diversification when they sign contracts with multiple banks and acquirers, although genuine diversification only comes from understanding the actual infrastructure behind those providers.

Bank A and Bank B might both use the same correspondent bank for USD transactions, while Payment Provider A and Payment Provider B might both send their incoming card data to the same acquirer. The same applies across the whole industry: liquidity, foreign exchange, local payment methods, virtual IBAN accounts…. A FinTech might proudly maintain five commercial relationships with five separate entities, while all five ultimately depend on the same bank, processor or technical infrastructure. Separate contracts, dashboards and fees: but they all can easily lead to the exact same institution behind the scenes. Calling this diversification is a huge risk.

If that underlying institution changes its risk appetite, pricing or supported jurisdictions, several, seemingly unrelated providers can experience disruption at the same time.

Real diversification requires independent routes throughout the entire movement of money, but provider relationships are rarely public and often remain closely guarded industry secrets. Someone therefore needs to know exactly what questions to ask and where to look to understand the full picture and identify which providers still rely on the same banks, systems or payment routes. This alone, is a skill.

What a Payment and Banking Strategy Actually Means

A payment and banking strategy follows the complete journey of the money, from the moment it enters the company until the moment it leaves. It also builds the commercial, operational, technical and risk systems that support this journey.

A FinTech needs this strategy just like any other business. It must choose which correspondent banks, intermediary banks, acquirers, payment providers, liquidity providers and processors will handle each part of the money’s journey. Every stage  connects with the next, so one little change can affect customer experience, risk management, technology, product development, data security, compliance, finance, sales and growth.

The FinTech must understand which providers support its products, currencies and countries. It must also know which provider converts each currency, who controls the technical connection and how much every provider earns on the deal – so they know how low they can negotiate their fees. These decisions are the heart of the FinTech operation and will make or break the success of the business.

A proper strategy also examines every aspect that the money touches. This includes contractual rights, termination periods, reserves, settlement schedules, safeguarding arrangements, operational support, data access, reconciliation, technical connections and escalation procedures.

FinTechs must also understand how each provider views their business, which customer can increase or reduce their overall portfolio’s risk level and which changes  influence their relationship with the partners. A provider might be open to a certain business sector today but change their mind tomorrow after losing a major customer, changing its correspondent bank or receiving pressure from another institution along the money’s route.

A proper strategy creates several alternative and independent routes for critical services, spreads transaction volumes across those routes and gives every provider enough active business to keep the relationship valuable. A backup account with no transaction history provides little help during an emergency because the provider still needs recent information, working technical connections and confidence in the FinTech’s activities.

The strategy must connect payments and banking with product development, technology, customer experience, compliance, treasury, finance, data security and growth. Every promise that a FinTech makes to its customers depends on the banks, providers and technical connections that move the money behind the service.

Why Education Matters

Currently, FinTechs make expensive mistakes based on trial-and-error experience or gut feeling, and this is costing the economy millions. The worst part is that it does not only affect their businesses but also their customers, employees' livelihoods and therefore the larger economy. Well-informed decisions on how the industry works are vital for the sake of all of us.

Only education can fill this gap and give FinTechs a common language which connects all areas of their operation, including finance, compliance, product, technology, treasury and risk. Education is the only reliable source of information which helps FinTechs make informed decisions and gives guidance on how to operate efficiently.

The problem is that hardly any independent education exists on the market.

Today, the majority of industry training is provided by the sellers: banks and payment providers, which all want to sell their own products. Companies are tricked into thinking this is genuine and that this training provides enough education, but forget that it has only one goal: to make them buy more, even if they do not need these services.

Commercial information presented as independent education is very dangerous and can never replace genuine knowledge.

However, building the right education can only start with recognising the actual trade. FinTechs need to realise that payment and banking strategy is no longer a side function of finance, but the heart of their operation. They will need trained specialists instead of relying on the advice of providers' salespeople, who all earn commission by talking them into buying new solutions. Independence is a unique but very much needed skill, as only unbiased professionals can honestly screen the market with confidence, knowing what to look out for and matching what is best for the organisation.

Only when we understand how important this topic is and can define its full scope can we set professional standards, a code of ethics, and industry best practice and also create the educational programmes.

Until then, FinTechs will keep relying on trial and error - with their customers' funds.