• Composable Architecture in Banking

    Traditional monolithic architectures are showing to be less and less effective in the fast-paced world of modern banking, where innovation and agility are crucial. More flexible and dynamic architectural paradigms are being adopted as a result of the need for quick adaptation to shifting market dynamics, customer demands, and regulatory requirements. One such paradigm gaining traction in the banking industry is composable architecture.

    Composable architecture represents a departure from traditional monolithic architectures, which are characterised by tightly coupled and interdependent components. Rather, it adopts a modular design philosophy, in which programmes are constructed as a group of independently deployable, loosely coupled services or components. The fundamental concept of composable architecture is composability, which emphasises the capacity to dynamically assemble and reassemble business capabilities in response to changing demands.

    Recent years have seen a dramatic shift in the banking architecture landscape due to technological advancements, changing customer expectations, and heightened competition. In this context, modular and flexible system and process architecture, or composable architecture, becomes a strategic approach that helps banks foster innovation, scalability, and agility.

    What is Composable Architecture?

    Core Principles of Composable Architecture

    Fundamentally, composable architecture consists of four essential elements that set it apart from conventional methods. According to Gartner, these include:

    Modularity: Composable architecture encourages the breaking down of large, complex systems into smaller, reusable services or modules, each of which is in charge of carrying out particular business operations. This modular design enables greater flexibility, as individual components can be developed, deployed, and scaled independently, without impacting the entire system.

    Autonomy: Allowing these modular parts to function separately and integrate with other parts with ease.

    Orchestration: Using APIs and other integration tools, coordinating these independent components’ interactions and integration.

    Discovery: Making it simple to find and use pertinent parts from both internal and external sources. 

    Key Components of Composable Architecture

    Composable architecture comprises various elements, including:

    Microservices: Small, independently deployable services that encapsulate specific business functionalities.

    API Gateway: Acts as a single entry point for clients to access multiple microservices.

    Event-driven Architecture: Facilitates asynchronous communication and decoupling between services.

    Containerisation: Packaging microservices into lightweight, portable containers for easy deployment and management.

    Why is Composable Architecture Good in Banking?

    Composable architecture adoption provides banks looking to modernise their IT operations and infrastructure with a number of strong advantages. The digital onboarding, loan origination, and debt collection phases of the credit management lifecycle will be the main topics of discussion in this article. 

    How is Composable Architecture Good for Digital Onboarding? 

    Financial institutions can benefit from compositable architecture in digital onboarding platforms as it can help them become more agile, innovate more quickly, and offer a more individualised customer experience.

    1. Agility and Speed to Market: Financial institutions can launch new products in a matter of months thanks to composable architecture, greatly reducing time-to-market.  This is accomplished by merging pre-existing, modular components and making sure that no legacy technology is interfered with.
    2. Hyper-personalisation of the Customer Experience: By utilising APIs to link different services and systems, composable banking technology can assist banks in providing a more personalised customer experience. With this strategy, banks can leverage more internal data sets for contextual engagements while providing a smooth and integrated experience for customers.
    3. Data and Customer-Centric Proposition The idea behind composable banking is to enable integrated data sets and a single source of truth, which enables the provision of individualised experiences and the use of advanced analytics to facilitate more informed decision-making.
    4. Low Maintenance Costs and Automatic Upgrades: Composable banking requires fewer resources, no major capital investments, and comes with low maintenance costs and automatic upgrades.

    How is Composable Architecture Good for Loan Origination?

    Composable architecture in loan origination platforms for banking offers several benefits that can help financial institutions increase agility, innovate faster, and provide a more personalised customer experience.

    1. Enhanced Customisation for Lenders and Clients: Lenders can tailor the origination process to their particular requirements when using a composable process. For instance, they might decide to automate the underwriting process by using a machine learning-based credit decision engine. Or they might decide to use a third-party data provider to validate borrower information. They can also easily incorporate the latest and greatest technology features specific to their customers’ unique needs.
    2. Reusability: Developers can create new functionality more often by utilising pre-existing components in multiple applications thanks to composable architecture.  This guarantees that applications are built with a high degree of consistency and reliability while also accelerating the development time.
    3. Scalability: Financial institutions can scale their applications by adding or removing components as needed without affecting the system as a whole thanks to composable architecture.  Hence, without compromising effectiveness or performance, businesses can readily adapt to shifting traffic volumes and user demands.
    4. Unlock Greater Innovation and Return on Investment: Composable architecture enables banks to create once, then share, connect, and repurpose their digital assets and data in novel ways to spur innovation, address challenges, and accomplish a variety of goals.  It is a brilliant, effective method of getting more use out of their technology investment and a higher return on investment.

    How is Composable Architecture Good for Debt Collection?

    Financial institutions can benefit from several advantages provided by composable architecture in debt collection platforms, including increased efficiency, lower costs, and better customer satisfaction.

    1. Personalisation and Customer Experience: By employing data analytics and customer segmentation to customise messages to each individual’s needs and preferences, banks can personalise their communication with debtors thanks to composable architecture. This strategy can improve customer relationships and raise the likelihood of a successful debt recovery.
    2. Agility and Adaptability: Composable architecture allows banks to respond quickly to changing market conditions and customer demands. A bank, for example, can incorporate a new payment method or cryptocurrency module into its platform if it detects a growing demand for such services.
    3. Digital Engagement and Automation: Digital tools and automation can be integrated with composable architecture to provide debtors with hyper-personalised interactions with banks. Self-service applications that manage payments, cheque balances, and request payment rearrangements are examples of this. These apps have the potential to increase customer satisfaction and recovery rates. 
    4. Cost Efficiency and Innovation: Composable architecture can help banks reduce costs by allowing them to use best-in-class solutions and services rather than relying on a single vendor. This approach can also promote innovation by allowing banks to introduce new fintech features and products alongside their core systems.

    Challenges and Risks for Composite Architecture in Banking

    Even though composable architecture has many advantages, there are risks and obstacles associated with its adoption.

    1. Integration Complexities: It can be difficult and complex to integrate various services and systems in a composable architecture environment, especially when working with legacy infrastructure or external dependencies. Banks need to make significant investments in solid integration frameworks and technologies in order to guarantee smooth component interoperability and communication.
    2. Security Concerns: As APIs and microservices proliferate, so do the attack surface and potential points of entry for cyber threats. This presents new security considerations and vulnerabilities associated with composing architecture. To protect sensitive data and transactions in a composable environment, banks must put strong security measures in place, such as authentication, authorisation, encryption, and monitoring.
    3. Component Identification, Individual Development, and Interoperability Challenges: Organisations can easily accelerate software development processes by simply enabling the reuse of code and eliminating (or at least reducing) the need to develop code from scratch. However, identifying the appropriate components, developing them independently, and ensuring interoperability can be difficult.

    Implementation Strategies for Composite Architecture in Banking

    Careful planning, execution, and governance are necessary for the successful adoption of modular architecture. Depending on their unique requirements, capacities, and priorities, banks can use a variety of implementation strategies.

    Banks can choose to implement composable architecture in stages, beginning with isolated projects or initiatives and gradually expanding its scope and footprint throughout the organisation. Or, in a more drastic move, banks might decide to completely restructure their entire IT environment from the ground up by starting a rigorous transformation journey.

    Regardless of the adoption approach, banks should adhere to certain best practices to maximise their chances of success. These include developing cross-functional cooperation and communication, defining precise business objectives and metrics, coordinating technology choices with strategic objectives, and utilising automation and DevOps techniques to expedite development and operations. 

    Case Studies of Banks Embracing Composable Architecture

    Composable architecture has been adopted by a large number of banks and financial institutions globally in order to promote innovation, agility, and competitiveness. Let us look at a few interesting case studies to show how composable architecture is being used in banking.

    Several leading banks and financial institutions have embraced composable architecture to drive innovation, agility, and customer-centricity. For instance, the multinational Spanish banking group BBVA has accelerated digital transformation and modernised its IT infrastructure through the use of a composable approach, which has shortened the time to market for new goods and services.

    For its core banking system, New-Jersey based Cross River Bank has also embraced an open banking framework that facilitates the quick development and implementation of new services, as well as a modular and flexible architecture. Cross River Bank has effectively changed into a technology-driven community bank that provides a broad range of cutting-edge financial services while adhering to its community-focused roots by utilising composable banking solutions.

    Regulatory Considerations for Implementing Composite Architecture in Banking

    Adherence to regulatory mandates is crucial in the heavily regulated banking sector. Banks must manage a complicated web of rules and guidelines controlling data security, privacy, risk management, and financial reporting as they make the switch to composable architecture.

    Banks have to make sure that their modular architecture conforms to all applicable regulations, such as GDPR, PSD2, PCI DSS, Basel III, and KYC/AML regulations. This means putting in place strong data protection protocols, carrying out frequent evaluations and audits, and keeping thorough records to prove compliance.

    Regulatory frameworks and guidelines play a significant role in shaping the design and implementation of composable architecture in banking. Open banking initiatives, like the European Union’s Revised Payment Services Directive (PSD2), require banks to make their APIs available to third-party developers. This encourages the use of composable architectures, which in turn promote API-driven innovation and integration.

    Banks can use a variety of tactics to stay compliant in a composable architecture environment, such as putting secure coding practices into place, enforcing data encryption and access controls, performing frequent security audits and assessments, and working with industry associations and regulators to stay on top of changing standards and best practices.

    Future Trends for Composite Architecture in Banking

    Future developments for composable architecture in banking are expected to be influenced by a number of up-and-coming trends, including:

    The evolution of composable architecture is being driven by emerging technologies like distributed ledger technology (DLT), cloud computing, and serverless computing. These advancements allow banks to create more inventive, scalable, and resilient systems and services.

    The banking industry is expected to adopt modular architecture due to the growing demand for agility, innovation, and cost-efficiency in a digitally-driven and fiercely competitive environment. Composable architecture will allow banks to work together more effectively and create new opportunities for value creation. This will change the banking ecosystem and the way customers interact with banks.

    Although composable architecture seems to have a bright future, banks still face a number of obstacles and unknowns, such as regulatory scrutiny, complicated technology, a talent shortage, and pressure from competitors. However, banks can turn these difficulties into chances for sustainability, growth, and differentiation if they have the proper leadership, execution skills, and strategic vision.

    In a Nutshell

    In summary, banks are designing, constructing, and running their IT systems and services differently now thanks to composable architecture. In a world that is becoming more digital and dynamic, banks can seize new chances for innovation, agility, and competitiveness by embracing modularity, flexibility, and interoperability. Although the transition to composable architecture may present obstacles and hazards, banks that are prepared to embrace change and shape the direction of banking architecture stand to gain a great deal.

    About JurisTech

    JurisTech is a leading fintech company, specialising in enterprise-class software solutions for banks, financial institutions, telecommunications, and automobile companies globally.

    We power economies by reimagining financial services with cutting-edge software solutions, which includes artificial intelligence (AI), auto-decisioning, digital customer onboarding, loan origination, credit scoring, loan documentation, litigation, and debt collection. 

    Our solutions have enabled businesses across a broad array of industries to undergo digital transformation, providing enhanced customer experiences and, most importantly, achieving their business goals.

    By and | 2024-05-16T12:30:48+00:00 3rd May, 2024|Insights|

    About the Author:

    The team at JurisTech's Marketing & Communications, a group of digital marketing strategists and content creators, delivers invaluable insights and expertise drawn from fintech experts across the entire JurisTech team. For media queries, get in touch at mac@juristech.net.