If there is an industry that understands the restrictions that come with legacy infrastructure and monolithic applications, it’s the banking industry. With millions of data points locked away on older mainframes and servers that are accessed with heavy, brittle, and complex code like COBOL, banks keenly feel the need for transformation initiatives.
Yet, the applications that act as the underpinning for financial services are too critical for banks to consider being on the bleeding edge of implementation. Ideally, banks would like to follow in the footsteps of those who have proven the value and shown the advantages of a technology or methodology before diving in themselves.
The concept of composable businesses fits these requirements well. Banking executives in highly composable organizations that were surveyed as part of Gartner’s 2022 CIO and Technology Executive Survey reported higher overall business performance, increased funding and revenue, less risk, and reduced operating costs over those financial services organizations that had low to moderate composability.
Certainly, the value is there. So, where can banks look for a roadmap to composable business? In many ways, retail offers a close approximation to the banking model. Plus, retail has been able to explore composable business strategies more freely than banks, thanks to fewer regulatory requirements.
The question then becomes “What lessons can banks take away from retail’s experience with composability”?
What is a Composable Business?
Composability is all about being agile, flexible, scalable, and adaptable. With the right organizational structure and tools, these businesses can react faster to changes in the market or threats from competitors while better meeting the shifting demands of customers.
As defined by Gartner, composable businesses combine mindset, practices, and tools to “sense and respond to changing business conditions”. This requires the organization to leverage three components:
- Composable thinking: An institutionalized mindset within the organization that encourages thinking about the future and across departments to create solutions.
- Composable commerce architecture: An ecosystem that supports a business’s ability to choose from best-of-breed solutions.
- Composable technology stack: A stable of resources, applications, and functional elements that can be combined and recombined for innovation and scalability, such as a MACH ecosystem (Microservices-based, API-first, Cloud-native, and Headless).
Together, these form the foundation for businesses to adhere to the core principles of a composable business model:
- React faster by being able to sense change sooner
- Use interchangeable components for increased business and technology agility
- Respond to changing needs and demands in innovative ways by mixing and matching appropriate business functions
- Encourage autonomy and greater resilience across business units
3 Lessons for Banks from Composable Retail
Reduce Friction in Customer Interactions
When consumers experience unnecessary friction in the buying process it can utterly disrupt a retail purchase. E-commerce stores, on average, see cart abandonment rates of 68%, with much of that due to slowdowns in the purchase stream.
It can have a bigger impact than that for retailers, though. A report by the Aite Group concluded that merchants lose as much as 75 times more revenue to false declines than they do to fraud. The embarrassment and frustration associated with false declines add extra steps into the purchase process – ones that consumers aren’t willing to work through.
It may sound counter-intuitive, but many retailers add in more applications to lessen friction. Instead of relying on a single, large application to do everything, retailers pull together best-in-breed applications that serve their purposes well.
For example, an online merchant can choose a powerful and scalable storefront solution and integrate it using the API from an industry-leading fraud protection platform that leverages AI to evaluate purchases instead of simple fraud scoring algorithms. From there, the merchant can add in a CRM with marketing capabilities to create personalized messaging, bringing customers back for additional purchases.
Banks can take a page from retail’s composable business book by reducing friction for consumers and businesses. Banks can pull together different business units and their data to accelerate loan approvals, for instance, or mine customer information to find those who qualify for and are interested in additional products or personalized services. It’s estimated that personalization in banking can increase product sales by as much as 40% and reduce customer churn by 10-30%.
Leverage Headless Commerce Solutions
Headless is a key element in a MACH ecosystem, and for good reason. Headless solutions are those that operate without a user interface. Instead, they are a building block that is combined with other technologies, like a front end for users, to create products and services.
Retail has taken advantage of headless architecture to great success. Various retail functionality in a headless banking environment – like inventory management and sales – decouples these elements from the front end. That means that the pieces that work the same regardless of the form factor the user employs can be developed and maintained separately from the presentation layer.
Inventory levels are the same, whether the consumer visits the retailer in person, from their computer, from their mobile phone, or even through their voice assistant, like Amazon Alexa or Google Home.
Several large retailers have taken advantage of headless commerce solutions to great success. Nike, for instance, went with a mobile-first approach and was able to gain significant market share from their competitors. Target, after realizing that 80% of their customers start a purchase on one device but finish it from another, shifted to a headless solution as well to support the omnichannel experience for consumers.
Banks can leverage a composable strategy to expand access to products and information while minimizing application development time and maintenance costs. Account information is an ideal example. The information needed to view and many times act on an account is the same whether you are a teller or a customer and whether you’re using a mobile banking application or a web-based one. The functionality needed to manage the account is the same, regardless of the method that the user employs to see the information.
Respond Rapidly to Shifting Market Conditions
No one can deny that retailers needed to change the way they did business – and fast – during 2020. Those whose architectures were nimble were able to make rapid adaptations that helped consumers and kept revenue coming in. Those that were shackled to less agile infrastructure and architecture were slow to adapt, and suffered for it.
Take, for example, stores that were able to rapidly shift purchases to support Buy Online Pickup In Store (BOPIS). Consumers were still able to get their purchases rapidly – from groceries to electronics – and stores kept teams employed and revenue flowing. As time went on, stores found that many consumers preferred this shopping modality, even after lockdowns were lifted and it was safer to return to brick-and-mortar shopping.
The key to shifting to BOPIS was a combination of composable business thinking, architecture, and technology. Processes and procedures were rapidly developed to ensure safe interactions for employees while limiting fraud risk and theft. E-commerce applications began feeding information down to local stores, while those same stores automatically reported back inventory levels in near real-time. Furthermore, communication between stores and headquartered applications permitted consumers to see order status through online portals and receive text updates. All of this required the ability of retailers to change operational modes rapidly, pull together relevant functionality, and repackage it in useful and timely ways.
Composable business models can help banks make needed moves to address changing market conditions and bring in new technologies to address emerging challenges. For instance, government-backed business loans and grants during the pandemic required rapid response from financial institutions. As discussed in our recent report on the “Top Technology Trends for 2022”, those banks that were able to leverage hyperautomation as part of the loan process were able to expand their customer base and serve more businesses amid a crisis.
Retail has blazed a path for banks when it comes to composable business thinking and solutions. Both industries serve a consumer base, both B2C and B2B, and face many of the same challenges as a result. Retail has proved the value of composability, especially when adopting MACH ecosystems, and banks can benefit from the forward strides retail has made.
DMI’s FinTech Expertise
DMI’s experience with financial services organizations has revealed that technologies like microservices and APIs are inherently contained and present both opportunities and challenges. Financial services can show the benefits of composable elements quickly, but these strategies must be well architected and planned to be effective. Organizational goals should be considered in choosing the right projects as well as existing architecture, technology, and business needs.
To learn more about DMI’s work with banks and financial institutions and how we can help you move to a more composable business model, contact us.