Experts Say Composable Banking Builds Better Digital Customer Experiences

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Digital banking architecture is having a moment. Financial technology companies and consumer-facing neobanks are using it to create new features, applications and customer experiences. Regulators are focused on it as they try to make sense of their potential involvement. And as its importance spreads beyond the chief technology officer, financial services executives need to become familiar with its changing structure if they want to understand the future of their business.

The issue is especially urgent as banks upgrade their back-end systems for account and transaction management. The FinTech community is offering a variety of solutions that cater to this emerging need, focusing on the “below the glass” space, which encompasses deposits, payments and lending.

Many traditional banks have not only partnered with these innovators in a banking-as-a-service model but have also ventured into developing their own digital platforms on modern technology stacks. Some have chosen to revamp their payment systems. These initiatives are a sign that the new generation of core processing solutions is ready for widespread adoption.

“It’s becoming an imperative to improve the operational efficiency at these legacy banks and be more responsive to client needs and industry trends,” Galileo Head of Product Strategy Michael Haney told PYMNTS, saying that these new generation of platforms is based on MACH principles: microservices, APIs, cloud and headless.

As Haney explained it, companies like Galileo start by creating a reusable library of granular building blocks. Those building blocks — imagine Legos rather than server stacks — are used to build core services that will help to break down traditional silos to create new financial products and feature sets. Those new features are then exposed through APIs to ease integration to other systems and are then deployed in the cloud to scale more easily.

Haney recently led a roundtable discussion on “composable banking” with PYMNTS in which he and two other banking innovators detailed how it is affecting the consumer digital banking experience.

Composable banking — which uses components instead of monolithic mainframes to deliver financial services — is not the future of digital banking, the panel said. It is active and urgent in the present.

Evolution of Core Banking Architecture

As Haney and the other panelists explained, composable banking is an architectural approach that allows financial institutions to assemble and reassemble various banking components into tailored solutions that meet specific customer needs. This modularity enables banks to swiftly adapt to changing market demands and integrate innovative services without overhauling their entire systems.

“Many banks are finally making some serious effort to modernize their back-end account and transaction processing systems,” Haney said. “These experiences have taught them that the latest generation of core processing solutions is ready for prime time.”

Haney elaborated on the evolution of core banking systems, highlighting that the earliest systems from the late 1960s were built on mainframe technology. These Gen 1 systems, though reliable, were monolithic and costly to maintain.

Gen 2 systems, emerging in the late 1980s and 1990s, introduced modularity with service-oriented architecture but were still limited in their integration capabilities.

Gen 3 systems, built around microservices and cloud-native architectures, set the stage for the composable banking approach that is now driving innovation.

For Varo Bank and MoneyLion, composable banking has translated into enhanced customer experiences and the ability to swiftly roll out new products. Sachin Shetty, chief technology officer at digital bank Varo Bank, explained how this architectural shift is manifesting in their offerings.

“Gen 3 systems, built as microservices, allow us to choose the parts of the core that give us the highest leverage in our build-versus-buy decisions,” Shetty said. “We can leave the commonality of what the core does and focus on building unique experiences for our customers.”

Varo Bank’s composable approach has enabled it to launch products like Varo Advance, a short-term loan program, and the upcoming Varo Line of Credit, designed to help customers manage unexpected expenses. These products, developed leveraging composable architecture, provide quick, hassle-free access to funds, illustrating the agility and customer-centricity that modern core systems afford.

Phill Rosen, chief technology officer at MoneyLion, shared a similar sentiment, emphasizing the importance of composability in delivering a seamless customer experience. “It starts with having the core functionality below the waterline, the invisible pieces of it,” Rosen said. “We combine first-party microservices with third-party systems to create a cohesive and enhanced user experience.”

Rosen said MoneyLion’s journey from a neobank to a comprehensive financial services platform underscores the impact of composable banking. By integrating third-party products into its ecosystem, MoneyLion offers a wide range of financial services, enabling customers to choose the best solutions tailored to their needs.

Change in Mindset and Technology

Transitioning to composable banking is not only a technological endeavor but also a significant cultural shift. Haney highlighted the necessity of a mindset change within banks to fully embrace this new approach.

“As an ex-banker, I witnessed the dichotomy, where banks invested heavily in digital front-end solutions while their back-end systems lagged behind,” Haney said. “This created a disconnect, limiting their ability to innovate rapidly.”

Banks traditionally operate in silos, with separate teams for payments, deposits and lending, each working at different speeds. This approach, Haney argued, is outdated. The modern banking landscape demands an integrated, agile mindset where teams collaborate across functions to deliver value continuously.

Rosen echoed this sentiment, pointing out that the shift is also driven by changing consumer expectations. “Every consumer is expecting a digital-first experience,” Rosen said. “Mid-size and regional banks need to quickly adapt to provide full-service digital capabilities.”

Identifying Quick Wins

The roundtable concluded with insights on the business case for composable banking and the critical steps for successful implementation. Shetty emphasized the importance of organizational culture, advocating for leadership to champion a mindset of collaboration, iterative development, and continuous improvement.

“Think big, but start small,” Shetty advised. “Identify quick wins, form cross-functional teams, and build momentum with bite-sized goals.”

Haney underscored the necessity of a business-centric approach to core transformation. “Core transformation doesn’t have to be a high-risk proposition,” he said. “Focus on what the technology enables, such as improved customer engagement and product innovation, rather than the technology itself.”

All panelists agreed that the shift toward composable banking represents a generational change in both technology and mindset. As banks navigate this transformation, the emphasis must be on creating flexible, customer-centric solutions that leverage the strengths of modern core systems. By adopting a composable approach, they agreed, banks of all sizes and stages of maturity can position themselves for future growth, meeting the evolving needs of their customers with agility and innovation.

Image By: Pixabay

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