Buy vs. Build – How fintechs can save around two-thirds on risk orchestration fraud and financial crime costs
Edward Vaughan, senior director at LexisNexis Risk Solutions, looks at how fintechs can save millions of pounds by investing in a specialist risk orchestration platform, rather than building their own in-house risk management solution.
Firms are investing in multiple sources of data and systems to better detect and prevent scams and criminal activity. A survey by LexisNexis Risk Solutions and Sapio Research found that, on average, financial services providers rely on five external vendors for data sources or solutions to prevent fraud and financial crime across their customer onboarding and lifecycle. Risk orchestration can help firms to optimise this investment.
Some risk management strategies see these external sources of data and technology being deployed in silos, producing outputs that don’t always bear relation to one another. An effective risk orchestration platform can help overcome this. It will synchronise and streamline disparate processes to work together in harmony and avoid duplication of effort, conflicts, and delays. This can lead to greater efficiencies, quicker and more effective ways of authenticating and validating customers and transactions, and lower levels of friction, resulting in happier customers.
Keen to realise these benefits, we’re now seeing a strong trend of fintechs attempting to build risk orchestration platforms in-house – the belief being that this is the most cost-effective route. Our analysis shows this is simply not the case. Expenditure on a self-built platform can prove almost three times more costly over an initial three-year period than integrating a specialist risk orchestration solution, meaning firms could be wasting valuable budget.
We looked at the typical self-build orchestration costs for a mid-tier UK bank onboarding around 100,000 customers and processing an average of two million transactions per year. Banks of this size will often prioritise the development of their own software to try and make both short and long-term savings.
For a bank of this size, build costs would amount to around £3.1 million in the first year, with about a third spent on a team of developers to build and test the software. Creating an API that can bring together multiple different data sources and systems provided by third parties can be complex and time-consuming. It requires extensive development work, testing and close collaboration with external partners. This is why a decent portion of first year self-build costs will be consumed by project management and architecture costs. Remaining budget will go on annual licence costs and data fees, covering Identity and Verification (IDV), document verification, transaction monitoring, application fraud and AML screening.
In years two and three, our calculations include annual license renewal costs and data fees, and the costs of maintaining and developing a risk orchestration platform as infrastructure grows. Our own research suggests that 46% of firms are planning to increase the number of fraud and financial crime prevention measures they have in place in the coming 12 months. A platform must have the capacity to seamlessly integrate these new services and apps.
Even conservative estimates therefore put costs for year two and onwards at over £1.3 million per annum for a self-built platform, including ongoing development and integration of new fraud prevention data sources and solutions. Over the first three years, this investment could exceed £5.8 million.
Risk Orchestration – the cost-effective approach
Employing teams of specialist software developers is typically the most expensive part of a self-build approach. The alternative and significantly more cost-effective option could be to work with an expert partner to integrate a plug-and-play risk orchestration platform into an organisation’s infrastructure.
A specialist partner can draw on industry-wide insight and experience to help develop a solution that evolves with the organisation’s growth and can adapt to changing financial crime threats. Development costs are shared across the market, meaning a small-to-midsize firm can procure a high-performing risk orchestration platform without it sitting heavily on its balance sheet. Economies of scale across licence and data fee costs are also achievable through working with an expert partner.
Specialist orchestration platforms provide an automated, end-to-end solution for customer onboarding and ongoing monitoring, incorporating anti-money laundering screening, transaction monitoring and case management, all within a single, plug-and-play solution. It unites multiple different data sources and systems with easy, no-code configuration. Best of all, according to our conservative calculations, it could save firms around two thirds of the investment required for a self-built alternative, over the first three years, freeing up more than £3.5 million to invest back into a business.
The easy set-up and integration of a solution such as LexisNexis RiskNarrative is complemented by its simple user interface and the ability to drag and drop services and apps. It eliminates the need for costly IT-led operations and interventions, saving firms both time and money.
All financial services firms strive to enhance their fraud prevention activities, but all are simultaneously under pressure to reduce compliance costs. Risk orchestration is the perfect tool to help them achieve these opposing goals – the only question remaining is which path they will take to realise the multifarious benefits of risk orchestration: buy or build?
Join a free webinar on Tuesday 28th November at 2pm, when leading industry analysts and experts will explore the build versus buy dilemma and the many benefits of a risk orchestration platform. Click here to register now.
(1) In September 2022, SAPIO Research surveyed 201 UK finance organisations about their views of financial crime and fraud.