Accelerating Modernization Via Composable Banking

In the world of banking, reacting to change and effecting change are two different things. By the time you respond to a new trend or business need, the next disruption is, often, already here.

Why? Because change isn’t always straightforward and can take a lot of time, particularly when complex technology is involved. In fact, research shows that over half (55%) of banks have said the limitations of their legacy core are the biggest barriers to achieving their business goals.[1]

So, how did we get to this point, and what does the future look like?

For decades, financial institutions have been layering new technologies onto existing ones to meet demands and stay competitive. This reactive approach has created sprawling webs of legacy architecture that can be challenging and costly to upgrade, and far from agile. While this served its purpose historically, taking the industry to where it is today, it’s no longer fit for an era of continuous change.

Innovation agility is now essential, and for many institutions, composable banking is gaining momentum as a smarter, more sustainable way to both operate and modernize.

What is composable banking?

Composable banking breaks the traditional “monolithic” core into standalone capabilities, each focused on a specific area, such as deposits or lending. These lightweight capabilities operate autonomously but connect seamlessly through open APIs and event-driven architecture. This means financial institutions can modernize progressively, upgrading one (or more) capabilities at a time. It also gives them the flexibility to choose best-in-class solutions from across the industry and create their own ecosystem.

You could think of it as a modern transportation network. Instead of relying on one fixed railway line with multiple stops – slow and difficult to change – there is a system of interconnected routes and hubs that can be expanded or rerouted without affecting the entire network. Similarly, composable banking allows financial institutions to add or replace capabilities without disrupting their entire core banking system.

This is a fundamental shift away from the conventional approach to transformation, where hard-coded customizations might be required deep within the system, and the whole, tightly linked core might be impacted by upgrades in one single area.

What are the benefits of composable banking?

Legacy systems have, in many ways, become an expected reality in banking. They may keep operations running, but their rigidity often limits or even completely blocks growth and innovation. And when changes do happen, they can be drawn-out and messy.

Composable banking offers a phased, lower-risk alternative to core overhauls that can take years to complete and carry significant operational challenges due to the scale and complexity of the endeavor.

There are several benefits to this approach, including:

• Faster innovation: Simpler deployment enables financial institutions to swiftly launch products to meet customer and business demands.
• Curated ecosystem: Combine capabilities from multiple vendors and easily connect via APIs and events.
• Scalable services: Scale services, such as deposits or lending, independently.
• Cloud-native resilience: Improve scalability, security, and efficiency.
• Easier maintenance: Reduce operational complexity through independently upgradeable capabilities.
• Lower costs: Reduce complexity and spread investments over time.
• Reduce vendor lock-in: Simplify maintenance and avoid reliance on outdated technology and expertise.

What is becoming increasingly apparent is that transformation no longer needs to be all or nothing. By breaking down business functions into independent capabilities, financial institutions can modernize at their own pace – experimenting, fine-tuning, and creating value much earlier in the process. Most importantly, financial institutions embracing composable banking are adopting much more than new technology – they are adopting a new culture around innovation and embracing change.

Those who stick with rigid legacy systems risk operating on an entirely different playing field; those who embrace composability are embedding innovation into their business, with more rewarding experiences for both employees and customers.

References

[1] https://ibsintelligence.com/ibsi-news/core-banking-crisis-55-of-banks-cite-legacy-systems-as-top-barrier-to-transformation/