By Prema Varadhan, Chief Product and Technology Officer, Temenos
Today’s big banks face multiple challenges. Consumers expect the same digital convenience from their banks as they receive from other experiences. Regulators agree they should get it and have made it easier for new entrants, such as non-banks, to provide people with access to the financial services and information they want. These disruptors are armed with cloud-native technologies and mindsets that get them to market with new services at breakneck speed. They are also armed with capital—investors have piled on an average of $170 billion1 per year since 2018 to fund fintech (financial technology) expansion. Meanwhile, macro forces have not helped. Interest rates continue to be at historically low levels, disincentivising savers and eroding lending profits.
But one bank’s threat is another’s opportunity. Those that grasp the urgency and begin migrating now from the old technologies that hinder innovation at pace will win. Those that don’t will find it harder to compete in this new banking paradigm.
So, what sort of platform should banks be using? The answer is a composable one.
Learning the lessons
Banks need only to look at some of the most successful B2B (business-to-business) technology companies to understand the value of composability. These companies have taken a function—finance, supply-chain management, resource planning, procurement and fulfilment, or human resources—and created an entire suite of software capabilities, accessed through a single platform. Think Salesforce for CRM (customer relationship management), Oracle for ERP (Enterprise Resource Planning), Microsoft 365 for office functions and collaboration or ServiceNow for workflow management. Once a business is plugged into these platforms, they have everything they need, whether they choose to enable all the modules at once or gradually over time. And all without the burden of integrating, updating, localising and innovating, which falls to the platform provider to accomplish.
Compare this to the technologies that continue to dominate big banks. The picture here is of dislocated systems procured from multiple vendors, requiring complex integrations (and often more software) to enable process automation and a single view of data. What’s more, much of this runs on-premise, meaning banks must take on the cost, management and risks of hardware, networking and security.
Faced with such complexity, the temptation for banks is to hold what they have rather than undertake the costly rewiring needed to add new capabilities. In other words, the costs of innovation outweigh the commercial opportunities, while more nimble players woo customers with better services and experiences.
Defence to offence
A composable banking platform ensures that big banks can fight off disruptors’ threats to their core businesses. It can also help a bank develop additional revenue streams by extending its own portfolio of services and products.
That is exactly what Banca Mediolanum Group has achieved with its creation of Flowe, a new digital-only bank designed to attract younger customers. Building a bank from the bottom up would have taken years in the past. Using an open, composable banking platform, the challenger bank went live in just five months, onboarding 600,000 customers in its first half-year.
Varo Bank offers a similarly compelling use case2, having attracted four million new accounts in the 13 months since obtaining its US bank charter in July 2020. Behind its story is the improved agility from leveraging a cloud-banking platform, allowing it to compose solutions quickly built from best-of-breed capabilities. Its resultant lower operational costs (Varo estimates it serves customers at 25 percent of traditional banks’ costs) not only improve business margins but also allow for more competitive solutions to be launched, opening up opportunities with which other banks cannot compete.
Composable banking is also creating opportunities beyond traditional-market boundaries. Increasingly, non-banks are getting in on the banking game, directly using composable banking platforms to entice customers with credit offers, new payment methods, investment opportunities and wealth-management solutions.
But offering embedded-finance services directly has limits—regulation and know-how being two of the obvious ones. Banks that can enable merchants to expand their portfolios of embedded-finance products will take their shares of the revenue and may also collect new prospects to which to market their core banking services.
And it’s already happening. KPMG ranked3 embedded finance as the number one banking trend for 2022 “as numerous banks look to become service providers to non-bank and non-financial institutions looking to deliver a customer experience or service proposition involving financial services as a component of a larger offering.” Recent examples include JPMorgan Chase taking a majority stake in Volkswagen’s payments platform, while Walgreens, America’s second-largest pharmacy store chain, has partnered with MetaBank to launch Scarlet,4 a debit-account and payments card.
A composable platform allows for this to happen at scale. Without it, it would be too complex for a bank to integrate its systems, processes and protocols with those of a merchant. But the “plug and play” nature of a composable banking platform means a merchant is limited only by the breadth of capabilities available and how fast it wants to go.
How you compose matters
Composable banking is a broad concept. So, what matters in reality? What should banks be looking for in a composable platform? Openness is fundamental. That has become a rather nebulous term lately, so let’s add some detail.
A composable banking platform should be free to run in any environment, including any public cloud or SaaS (software as a service). It should also be database agnostic and leverage API (application programming interface) architecture. These things matter not only for deployment but also for the developer ecosystem that needs to be built around it. Developers are the lifeblood of a composable platform. Without their involvement in extending modules with rich new features or building entirely new capabilities on top of core ones, the platform will be starved of the innovation it needs to stay relevant. The platform must also embrace the ability for partners to bring their own solutions and integrate them easily. So, the platform must be cloud-native to enable containers, microservices and other modern DevOps (software development [Dev] combined with information-technology operations [Ops]) tools. There must be a sandbox environment to facilitate experimentation and testing and a marketplace through which developers can commoditize their work.
It is only through these open principles that a composable banking platform can generate the breadth and depth of capabilities for which it is designed; deployment flexibility to suit current and future needs; and ease of use, enabling fast adoption and scale.
All platforms are not created equal
Clues to the effectiveness of a composable banking platform can be found in the company that provides it:
If the platform claims to have scale, you’d expect that to be reflected in the company.
If the platform alleges it can configure capabilities, you’d expect the company to understand the complex legal, geographical, regulatory, currency, customer and product entities around which banks organise themselves and provide these setups as standard.
If the platform extols its open credentials, you’d expect the company to currently marshal and support an established and buoyant ecosystem of solution providers, software developers, system integrators and embedded-finance innovators.
When the platform invites you to trust it, you’ll be more inclined to do so when the company has a long track record of delivering for the world’s largest banks.
Crucially, too, banks should prioritise platforms with vendors that understand that the transformation pace is not uniform. For large banks, the adoption of composable banking is likely to be incremental; they cannot simply give up on their incumbent technology but must migrate gradually to run down their legacy investments. While challenger banks, fintechs (financial technology firms) and non-banks eyeing growth through embedded finance will want to scale fast and adopt specific capabilities pre-composed for specific use-cases, such as buy now, pay later (BNPL), payments, digital mortgages or deposit accounts.
The time is now
Talk of the need for breadth in a composable banking platform may lead some to presume this means large-scale and complex adoption. The opposite is true. Breadth affords modularity—the chance to start small, deploy individual capabilities and then seamlessly add complementary functions or branch into new areas.
Profits generated through composable banking activity will ultimately dictate urgency. Banks and businesses that move first will be in pole position to analyse the commercial implications, double down and reap the most benefit.
1 Statista: “Total value of investments into fintech companies worldwide from 2010 to 2021 (in billion U.S. dollars).”
2 Tech Crunch: “Varo Bank Raises $510 million at a $2.5 Billion Valuation,” September 9, 2021.
3 KPMG: “Pulse of Fintech H2’21,” January 2022.
4 Walgreens: “Scarlet™, a New Bank Account and Debit Mastercard®, Launches Exclusively at Walgreens, Promotes a Path to Financial Health, Earns Rewards on Purchases at Walgreens and Beyond,” September 2, 2021.