Three Advantages of Composable Banking

According to the latest report by Cornerstone, the share of banks that intend to deploy “emerging technologies,” such as cloud computing, APIs and AI tools, has grown steadily over the past five years. However, legacy technology is a hurdle for financial institutions that aim to provide modern and advanced digital products for consumers; according to the same report, 48% of banks are dissatisfied with their core provider’s product innovation and 50% are dissatisfied with their core’s response to enhancement requests. Composable banking has emerged as a progressive solution for banks to quickly and cost-effectively digitize their platform.  

What is composable banking? 

Composable banking is a new approach that refers to building banking systems that break down the core into smaller, modular pieces that are quickly selected and customized to meet specific needs. Application Programming Interfaces (APIs) enable different systems to communicate and share data, such as between a core and a fintech, and facilitate composability. With composable banking, FIs can introduce new fintech features and products alongside their core through APIs, instead of completely replacing or reconstructing their architecture. 

Though this modular approach is better suited for innovation demands, many institutions hesitate to adopt composability due to a few misconceptions; for instance, there is a misconception that composable cores are expensive and unreliable and that one-stop-shop tech vendors are more cost-effective. However, composability has a number of advantages for FIs who are looking to digitize their offerings. 

Composable is easily implemented and managed.

Technology is rapidly evolving, and today’s consumers expect their FIs to look, feel and act like the other tech applications they know and love, such as digital entertainment, social media applications or e-commerce websites. Also, market forces, such as rising interest rates and slowing macroeconomic forces, have led FIs to reevaluate their customer experiences. For example, research by Accenture finds that rising interest rates have ignited bank product innovation, specifically to meet customer needs and offer personalized, integrated services across their product suite. 

To meet these expectations, financial institutions often turn to a single vendor to replace the entirety of their digital infrastructure. While a one-stop shop appears to be the easiest way to upgrade tech, this approach requires frequent updates and innovation constraints. A single solution cannot keep up with every technological advancement, obstacle and change down the road.

Alternatively, composable architecture can adapt, modulate and evolve with technological advances. Breaking down products and services into individual components enables financial institutions to quickly adapt to changing market conditions and customer needs. If a particular feature loses popularity or requires maintenance, developers can easily remove it without replacing the entire system and add a new feature in its absence. Additionally, developers can proactively introduce new capabilities ahead of the curve, enabling institutions to tap into new verticals. Institutions can be agile, competitive and responsive to customer demands while avoiding the traditionally lengthy process of total infrastructure reconstruction. 

Composable is cost-effective. 

Some financial institutions believe composable ecosystems are more expensive because they require multiple vendors. However, legacy systems are typically less sustainable and cost-effective in the long run due to the constant updates and customizations required to ensure compatibility with the changing digital environment. When the needs or demands of the organization inevitably change, legacy systems cannot be re-coded or re-engineered as easily as a composable model. With a single vendor, FIs must use precious resources to make that one system work, resulting in a slower time to market and reduced productivity.

On the other hand, composable architecture presents an opportunity for financial institutions to be more cost-efficient. By shifting from a time-consuming coding process to an API configuration, FIs can easily update their tech alongside the core resulting in a faster go-to-market. Low or no-code composable models also reduce the need for specialist resources or talent, freeing-up in-house resources for innovation and new product development. By the time the single-vendor upgrade is ready, competitors with composable architectures have already introduced and refined several capabilities.

Composable is more reliable. 

As composable banking is a cutting-edge and relatively new technology, some mistake it as the more precarious digital transformation option. The belief that one faulty software solution can bring the whole system down and the need for multiple vendors fuel the misconception that composability isn’t reliable. Segmentation is an advantage of composable architecture because each component is specially selected and implemented to meet the FI needs and run alongside the core. Composable banking enables FIs to leverage the best solutions on the market without slowing down innovation for a complete system overhaul.

Additionally, cloud-native, composable solutions mitigate risks. Cloud service providers manage each component in the ecosystem to ensure the best technology, expertise and protection against known dangers such as outages and cyberattacks. For example, institutions can incorporate tools designed to combat malware attacks and prevent data breaches for added security. Additionally, the incremental nature of composable architecture means that engineers can reverse installations if they no longer meet the needs of the FI.

The Future is Composable.

As the financial sector continues to evolve, composable banking is the most innovative foundation that offers endless possibilities for customization and scalability. Composable banking provides revenue, efficiency and security benefits, meeting the growing consumer demand without compromising usability. The future is composable banking, so financial institutions should embrace it now or risk being outdated.

About Author:
Robin Smith - Regional VP, North America, Mambu

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