Modular Banking: A Simple Guide

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Technology, regulation, and a global financial crisis paved the way for financial technology (fintech) to boom after 2008.
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Back then, the global fintech market was valued at USD $1 billion. Just over a decade later, in 2021, it was valued at USD $110.57 billion.

Now, online banking and fintech apps are a part of everyday life, whereas high street bank branches are gradually departing it…

Another important concept that has grown in parallel with the rise of financial service apps is modular banking.

But what is it, how does it work? Let’s take a look.

What is modular banking?

‍Modular banking is a type of banking technology that breaks down the numerous functions of retail and business banking and offers them as singular modules.
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Years ago, people would visit their local bank branch and fill in a paper leaflet to apply for one of the bank's services. Every service was owned and run by that specific bank. Choice was very limited.

Today, customers can choose from an ever-growing marketplace of financial tools from different providers, all anchored to a core deposit account.

Both traditional banks and fintech alternatives can allow customers to build more personalised product offerings by selecting exactly what they need from different tools (modules) that serve specific purposes.

These modules are pre-built pieces of software code that are easy for banks and fintechs to integrate and deploy as new services without having to build them from scratch.

A broad range of services are available from mortgage lending to stock trading and non-traditional payment processing, and much more.

And businesses can now integrate modules into their own platforms to make and accept payments through third-party partners.

Thanks to modular banking, it is now possible for companies or other types of organisation to offer financial services to their customers without the huge expense and red-tape of actually being a bank.

Examples of banking modules:

1. Loan origination module

A loan origination module is designed to simplify the process of applying for and obtaining loans for business purposes.

Its software collects and validates customer data and information, verifying their creditworthiness, calculating interest rates and fees, and managing documentation.

2. Fraud detection module

A fraud detection module provides data and insights into potentially fraudulent activity.

Artificial intelligence-based modules can automate much of this task.

They can learn from past behaviours in order to predict future activity and improve the accuracy of responses when necessary. This means the number of 'false positives' is reduced so fewer legitimate transactions are stopped.

Why use a modular account?

Modular bank accounts still come with sort codes or IBAN, access to payment schemes, and everything else that comes typically comes with a traditional bank account.

But they are much faster, easier, cheaper and more flexible than regular bank accounts to set up and use.

What is modular finance?

Modular finance is – like modular banking – when separate financial services (modules) are made available as ‘add-ons’ to customers.

This gives customers great flexibility and choice as they can use their preferred providers for separate financial products.

For example, they might choose one provider for pensions advice but prefer another for investments.

Management consulting firm Oliver Wyman estimated that the modular financial services industry could be worth up to $1 trillion.

What’s the difference between modular banking and modular finance?

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Modular banking is when a bank transforms their banking offering into a marketplace of different financial tools.

This allows banks to build personalised products and/or services for their customers, who select their desired tools.

Modular finance, on the other hand, is the same proposition but applied to all other financial services offerings.

In both cases, it allows customers to access a wider and more customisable range of banking and financial services.

How does the modular banking process work?

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To the customer, modular banking generally works like a marketplace. Their banking app should have an area where they can browse and sign up to selected banking modules.

The providers of these modules will have been pre-approved by the bank. Once selected, the integration should be relatively seamless and quick.

So, for example, a user signs into their banking app. They go to a ‘Additional Services’ area, find the category that interests them and browse the providers and offers.

Once they have selected a provider, that service will be accessible to them via the same app.

The benefits of modular banking

Like all banking technology innovations, modular banking offers a number of valuable benefits to both the bank and the customer.

1. Customisation

By turning themselves into a marketplace of financial tools, banks can build custom and niche product offerings by selecting the tools needed by the customer.

These additional custom services augment the core product and/or service solution without the risk or cost of a core development.

2. Enhanced customer experience

Modular banking allows banks to focus on building better services and stronger customer relationships.

The customisation aspect of modular banking allows for a more diverse product offering, giving banks the ability to serve niche industries and groups of people.

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By fully exploiting the modular banking model, banks and fintechs can provide their customers with:

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• Convenience: Customers can now access their account information, other services or service providers with ease
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• Customisation: Customers can personalise their banking experience so it operates and looks in line with their personal preferences
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• Control: Customers will feel in control of their lives with important financial information at their fingertips 24/7
  
  

3. Development of offering

The modularisation of the banking experience allows banks (both traditional and neobanks) to grow their business as well as products and/or service offerings.
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Banks can gradually integrate more products and/or services to enhance their proposition and take advantage of emergent financial services technologies based on customer profile and demand.

Conclusion

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Modular banking solutions give customers more control and choice than traditional banking services. They allow users to customise and integrate other financial service offerings into their bank's core solution.

Modular finance and modular banking are ultimately similar propositions. Modular banking applies to the banking industry, whereas modular finance applies to all areas of the broader financial services industry.

The modularisation of banking comes with great benefits to both the customer and the bank, from customisation to an enhanced customer experience.

It’s likely that over the next few years, modular banking will become widely adopted by banks and consumers across the globe.

Its ability to offer choice, value and convenience will ensure modular banking becomes the standard model for the provision of financial services to consumers and business users.

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