Embracing the Future Through Composable & Coreless Banking Part 1: Technology & Use Cases
As banks face pressures to operate with unprecedented cost efficiency and robustness amidst market undervaluations — with the sector trading at a distressing 0.8 price-to-book ratio compared to the global economy's 2.7 — composable banking emerges not just as a pivotal solution, but as an urgent reinvention of the banking model.
Through an assembly of discrete digital components, composable technologies empower banks to customize services with unprecedented agility and precision. These components facilitate the integration of emergent technologies — like AI for fraud detection and enhanced KYC processes — into existing banking operations. More crucially, they enable the reinvention of every banking layer, not only driving compliance but also reshaping risk management to effectively address emerging cyber and geopolitical threats effectively.
The transition to a composable and coreless banking infrastructure opens a realm of possibilities for banks looking to build a competitive advantage. However, it also brings its own set of challenges, from ensuring system reliability to managing intricate third-party ecosystems. In part one of this blog series, we’ll explore this pivotal technological shift, outlining its promises before diving into use cases. In part two, we’ll explore the various obstacles banks will need to address and the strategies they can employ to become more resilient – and thrive – in what’s already promising to become a more customer-centric era of banking.
Drivers of Change
The push toward composable banking is driven by a blend of technological advancements and stringent global regulatory demands. In the post-credit-crisis era, there has been a decisive shift toward the simplification of banking products spurred by the need to avoid the pitfalls of past complexities and to meet heightened regulatory standards for transparency and consumer protection. This has led to the emergence of financial products that are both simpler and more modular.
Simultaneously, the integration of Generative AI (GenAI) is revolutionizing banking operations, allowing for the automation of services and the personalization of customer experiences at scale. This AI-driven innovation supports the modularization of banking products, enabling banks to deliver services that are both customer-centric and compliant with regulations.
The emergence of Banking as a Service (BaaS) is further driving the adoption of composable banking, offering banking functions as modular services that can be seamlessly integrated into diverse business models. BaaS fosters a more agile and responsive banking environment, crucial for adapting to the rapidly evolving financial landscape and consumer expectations.
In addition, a strategic shift towards cloud-based, platform-oriented architectures is well underway, with banks increasingly embracing cloud services for both innovation and scalability. This transition is pivotal for maintaining a clean architecture, facilitating compliance and ensuring that banking services can be efficiently audited and adapted without the encumbrances of legacy systems.
Further driving adoption, smaller banks are increasingly leveraging FinTech partnerships, using APIs to create a technology landscape that is both accessible and conducive to digital transformation. This approach has allowed smaller institutions to deliver enhanced digital experiences without the prohibitive costs of engineering, furthering driving adoption of composable banking. In turn, this frees up engineering resources, allowing smaller banks to focus on other high-value endeavors.
As a result of these trends, the banking industry is definitively moving toward a more composable approach. As banks navigate away from the legacy of Service Oriented Architecture (SOA) and Enterprise Service Business (ESB) to more agile, serverless solutions, they are not just embracing an ongoing technological evolution but also laying the foundation for a future that balances agile innovation with regulatory requirements and customer expectations.
The Promises of the Composable Future
The past decade has seen a surge toward digitizing customer engagement, with banks leveraging modern technologies to create modular apps and websites. This shift has made continuous delivery a reality, enabling teams to autonomously deploy updates and enhancements, thus continuously delivering business value. However, this innovation can be easily stifled by core banking systems – the engine room of the bank – that still largely reflect dated designs.
This dichotomy in banking architecture presents more than a technical challenge; it is a strategic impediment to agility, innovation and even compliance. Recognizing this, the industry has seen the rise of composable banking providers, like Mambu and Thought Machine, who have developed cloud-native systems over the past decade that offer robust, scalable and agile alternatives to the legacy core systems of yesterday.
By decomposing banking architecture into clear, distinct domains, banks are afforded the flexibility to select the best-fit products for each domain, thereby reducing vendor lock-in, fostering innovation and allowing migration flexibility. With APIs becoming pervasive and integral to application design, banks are increasingly able to execute migrations and updates within domain boundaries, greatly minimizing the risk and disruption typically associated with broad system changes.
This refined approach emphasizes the importance of composability and ecosystem partnerships in modern banking technology. By embracing these principles, banks can better position themselves to integrate with a broader set of partners, allowing them to access new capabilities – like AI and data sources – which will prove critical in a rapidly-evolving financial landscape.
A Real-World Composable Banking Use Case
An established European bank was experiencing rapid growth, bolstered by its robust digital presence and loyal customer base. However, this growth brought to light the challenges posed by its legacy core systems, which began showing concerning signs of reduced reliability. These systems became increasingly inflexible and introduced escalating risks, especially regarding compliance. The rigidity of the old infrastructure was slowing down the bank's time-to-market, driving up costs and pushing the cost-income ratio to unsustainable levels.
In a decisive response, the bank embarked on a transformative journey to overhaul its core banking platform. Through the adoption of composable banking principles, the bank was able to deliver a customer experience that was not only seamless, but scalable, capable of adjusting to user demand and the ever-shifting dynamics of the financial world.
The bank delineated clear operational domains and, through a thorough selection process, chose best-in-breed products for each. The transition away from the monolithic legacy system to a suite of cloud-native, composable solutions was executed in phases. The result? Operational costs plummeted, innovation thrived and compliance became significantly less burdensome due to the new system's inherent agility and flexibility.
The Journey Forward
The journey toward the composable future will have major implications on the services and experiences banks are able to deliver, as well as direct implications on domains like compliance, innovation and operational costs. So, how do banks move forward? In part 2 of this blog series, we’ll look at the obstacles banks will need to overcome as they march toward the composable future, as well as explore strategies they can deploy to help ensure the journey’s success.
