The cloud will shape the future of banking

Today’s big banks face multiple challenges. Consumers expect the same digital convenience from their banks as from the likes of Uber and Amazon. Disruptive technologies have made it easier for new entrants to launch products fast and scale efficiently. New regulation and open banking are fuelling innovative solutions and business models such as banking as a service and embedded finance.

The new players are nimble, with no legacy technology to hold them back. To compete, banks need to break the shackles of incumbent systems. They need to assemble banking services and create new financial solutions rapidly.

They also need to look beyond their capabilities and open up to innovation happening everywhere.

Composable services and an open, collaborative approach are crucial to success in this new banking paradigm.

Ecosystems and platformization

Banks only need to look at some of the most successful B2B technology companies to understand the value of composability. These companies have taken a specific function and created an entire suite of software capabilities, accessed through a single platform. Think Salesforce for CRM, Oracle for ERP, 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, localizing, and innovating, which falls to the platform provider to do.

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 to enable process automation. Moreover, many of these legacy systems run on-premise, meaning banks must take on the cost, management, and risks of hardware, networking, and security. The cost of rewiring often outweighs the commercial opportunity. All the while, more nimble players attract customers with better services and experiences.

Speed and agility

A composable banking platform ensures that big banks can fight off the threat to their core business from disruptors. It can also help a bank develop new revenue streams by extending its own portfolio of services and products.

That is 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, on-boarding 600,000 customers in its first half-year.

Varo Bank offers a similarly compelling use case, having attracted four million new accounts in the 13 months since obtaining its US bank charter in July 2020. Behind their story is the improved agility from leveraging a cloud banking platform, allowing them to compose solutions quickly, that are built from best of breed capabilities. Their resultant lower operational cost (Varo estimates it serves customers at 25% of the costs of traditional banks) not only improves business margins but also allows for more competitive solutions to be launched.

Cloud-native architecture

A composable banking platform should be free to run in any environment, including any public cloud or SaaS. It should also be database agnostic and leverage API architecture.

These things don’t only matter 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 those easily. So the platform must be cloud-native, to enable containers, microservices and other modern DevOps tools.

There must be a sandbox environment to facilitate experimentation and testing, and a marketplace where developers can commoditize their work.

Only through these open principles can a composable banking platform generate the breadth and depth of capabilities that it is designed for; the deployment flexibility to suit current and future needs; and the ease of use that enables fast adoption and then scales.

The future is composable

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 in order to run down their legacy

investments. While challenger banks, fintech, and non-banks eyeing growth through embedded finance will want to scale fast and adopt specific capabilities that have been pre-composed for specific use-cases. Such as Buy Now Pay Later (BNPL), payments, digital mortgages or deposit accounts.

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 and 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 analyze the commercial implications, double down, and reap the most benefit.

By Prema Varadhan, Chief Product and Technology Officer, Temenos.

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