Is diversifying TPP partnerships necessary? - and what to do when third-party providers are unavailable.
TL;DR
The FSA and FI legally require all banks and lenders to allow the opening of new accounts and deposits/withdrawals at all times. As the shutdown of CM1 showed in December 2022, processes such as performing KYC or due diligence can sometimes be unavailable through TPPs. Your business must have a fallback in place in case of another outage.
TPP downtimes in Sweden
In December 2022, the banking sector faced a big issue: one of Sweden’s biggest data screening providers was down. Softronic-CM1 provides critical services such as KYC, AML, fraud, and PEP sections, so when the system went down twice last year, banks and lenders using this third-party provider (TPP) lost the ability to issue new loans or open new savings accounts.
CM1 completely shut off their service to avoid any data leakage, a wise choice when dealing with highly sensitive information required for banking applications. The data was protected, but a critical TPP was temporarily unavailable and, with it, the ability to provide essential services for consumers.
Banks must provide core services (with or without TPPs)
Software downtime happens—quite a lot for cloud-based services. For example, Microsoft had its downtime last month, and AWS had significant downtime two years ago. Even Google had two severe outages in 2022. While highly inconvenient, most of the time, users or customers can wait and try another time again. However, some of these downtimes have serious legal ramifications, too, particularly in the banking industry. In the case of lending, for example, banks are legally required to allow customers to open new accounts and to be able to deposit and withdraw savings. So when an outage due to a TPP or other issue happens, what might feel like an inconvenience suddenly becomes a significant issue.
Since the outage of CM1 in late 2022, FI prioritized the system stability issue in their latest 25.01.23 release. You must offer savings and deposits if you are a bank or a credit market company (a Kreditmarknadsbolag or KMB). Core services must always work, meaning unexpected system outages cannot affect the ability to open new accounts or do your due diligence. How you do your due diligence is not important, only that you can assure the FSA and FI you have the ability should anything happen. Therefore, you must have a backup if you rely solely on an external provider.
When TPPs are unavailable - what are the alternatives?
What do you do when your primary method of completing your due diligence is temporarily down? You may consider having two or more TPPs in place so that you route your processes to use another when one is unavailable. Or a third, or even a fourth. But is it feasible to have multiple solutions for KYC and AML?
While a good idea in theory, there are other options than this approach. The first is cost – some TPPs have a minimum monthly fee, so you still have to pay even if you don’t use it. The second is there is still a risk if one TPP is down that, the others are down as well. It is common for multiple TPPs to use the same infrastructure, meaning all TPPs may be down simultaneously. It is undoubtedly a good idea to have several integrations to rotate between – if you look at a company like Kreditz, this is one of the services that they provide: Kreditz has integrations with several different credit bureaus so if one of them is unavailable, Kreditz can still get the credit information from one of the others – but no matter how many partnerships with TPPs you have, it is still possible they could all be down at the same time.
The best solution is to have a manual fallback. Even if it is cost-justifiable to have multiple TPP integrations, you will still need the option to have everything handled manually to cover all eventualities. Doing processes offline and solely in-house is the only method you can rely on.
An alternative to TPPs: a built-in manual option.
While the idea of a manual backup in place seems regressive, we at Naktergal believe an all-manual fallback routine is a must for any business. We have built offline alternatives into our systems for years because stability has been a core part of our services from the get-go. We have standardized the system to make it easy and fast to onboard new customers, with or without TPPs. Our consumer lending system supports integrations with multiple TPPs, including compliance, meaning we can switch between Trapets and CM1 if something were to happen, like in the case of late 2022. Or if the whole network goes down, we always have a manual fallback.
Automation is excellent, but it needs to be smart. We have always felt this way – part of our process includes figuring out the best way to do things manually, then automating the process by mimicking how a person would do it piece by piece. This is how we build our systems, and it means everything that is automated, every button or process, a human person can do too. Not all automation works like this, but for us, building the system this way is crucial to ensure our system is robust. We ensure manual fallbacks are built into every stage of the application process so businesses are always protected from system failure.
We also explored the notion that not everything should be automated in a recent article: Digital dilemma: should we always automate?
Digital solutions, done the right way
As the last year has shown, tech sometimes goes differently than planned. In the case of the shutdown of CM1 in December, banks and other lenders must have backups in place to provide legally binding services such as issuing new loans and opening new accounts. FI’s new focus on system stability and removing risk makes this even more critical.
Having an option for when a TPP is unavailable, and most importantly, having a manual backup as an option within the lending industry, is critical to business robustness in today’s world. Naktergal puts stability at the heart of our consumer lending system. We are here, and we can help to reduce costs, improve efficiency and contribute to a better overall experience for consumers, even if it means doing it by hand.
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