From Cost Confusion to Compliance Clarity: The Composable Banking Shift
Behind the sleek digital interfaces and lightning-fast processing that define modern banking lies an uncomfortable truth: most banks cannot tell you what their compliance operations cost. Not in real time, not at a granular level, and certainly not when regulators come asking.
The gap is exposed when auditors demand a cost breakdown of a cross-border payment: fraud checks, sanctions screening, currency conversion, and compliance reporting. Banks can process millions of transactions in seconds, but often require weeks of manual work to explain how those transactions were governed and what they cost. This isn’t a minor inconvenience. It is a visibility crisis, and as regulatory regimes evolve, it is becoming an existential one.
The Monolithic Compliance Trap
The roots of this crisis lie in legacy banking architecture. Most core systems were designed for quarterly reports and annual audits, not for today’s demand for real-time accountability. Compliance was something tracked after the fact, in spreadsheets and central ledgers. That model collapses under modern scrutiny.
Consider a typical audit of anti-money laundering processes. Regulators want to know the exact cost per transaction. What should be a straightforward query quickly turns into a months-long project involving multiple departments and reconstructed estimates. The irony is hard to miss: the same systems that execute transactions flawlessly cannot explain themselves to those who govern them.
The regulatory bar is also rising. Europe’s Digital Operational Resilience Act (DORA)1 requires financial institutions to prove resilience and traceability across their technology stacks. The U.S. launch of FedNow2 brings real-time payments under new supervisory models that expect immediate visibility into routing and compliance. Meanwhile, The European Commission's proposed Payment Services Directive 3 (PSD3)3, currently progressing through the legislative process, will tighten data access and customer protections with enhanced transparency requirements. The common theme is speed: regulators expect answers in hours, not quarters.
Why the Old Fixes Fall Short
Faced with this gap, banks have tried to patch their way forward. Some have layered reporting tools and dashboards over existing systems. Others have outsourced compliance functions or leaned on robotic process automation to pull data faster. These moves deliver incremental improvements but add complexity without resolving the core problem.
At heart, the systems still treat compliance as an afterthought. They can process transactions in real time, but explain themselves in slow motion. This structural mismatch is why compliance costs continue to climb, with recent BCG research4 showing banks spending 1% to 3% of total costs on compliance operations alone, without delivering greater transparency or regulatory confidence.
Composability as Compliance Strategy
The only way to align operations with compliance is to address the architecture. This is where composability shifts from a modernization buzzword to a regulatory necessity. Institutions can finally align their technology boundaries with how regulators view risk by reconfiguring banking into modular, self-contained components.
A KYC module that knows exactly what resources it consumes. A fraud detection engine that can report both costs and prevented losses. A payments component that delivers per-transaction visibility. These are not aspirational features; they are the natural output of composable design.
The transformation opportunity is massive. As of 2023, Gartner research5 showed only 7 percent of financial institutions demonstrated high levels of composability, with 60 percent of finance organizations seeking composable finance applications in new technology investments by 2024. This trajectory reflects growing recognition that compliance visibility requires architectural redesign.
Strategically, not every system needs to be modularized. Functions under the greatest regulatory scrutiny, such as customer onboarding, payments, and fraud detection, should be prioritized. Back-office processes with lower exposure can remain consolidated. The key is that component boundaries mirror regulatory categories, not just IT convenience. This alignment allows banks to answer auditors in the same language regulators use.
Orchestration and Human Oversight
Breaking systems into modules is only the first step. The real differentiator lies in how those modules are orchestrated. A composable architecture needs an intelligence layer that can route transactions through compliance-aware paths, automatically attribute costs, and generate audit trails as an organic part of operations.
Encora’s AIVA™ orchestration platform6 illustrates this approach. By embedding compliance logic into transaction flows, orchestration ensures that every requirement is met without slowing down business. A cross-border payment, for example, can be routed through the appropriate KYC and fraud components, each tagging its costs and audit data in real time. Compliance is not reconstructed later; it is built into the transaction itself.
Equally important, this model does not remove human judgment. Regulators rarely trust black boxes. Compliance teams must be able to inspect, explain, and act on the insights produced by modular systems. Composability augments human oversight rather than replacing it. Machines handle attribution and reporting; people provide accountability and trust.
From Burden to Advantage
The strategic implication is clear. Compliance can no longer be treated as a burden that slows growth. In a composable model, compliance becomes a differentiator. Banks that can answer regulators quickly and confidently gain more than reduced risk; they gain trust, operational flexibility, and faster approval for new services. Imagine the competitive advantage of launching a new payment rail or embedded finance product without months of compliance retrofitting. With composable compliance, audit readiness, and regulatory transparency are built in. For C-suite leaders, the choice is stark. Compliance costs will rise, and regulatory demands will intensify. The question is whether those pressures will continue to drain resources and slow transformation or become catalysts for new, composable ways of working. Banks that invest now in aligning their architecture with regulatory expectations will not just stay ahead of audits. They will turn compliance into a platform for resilience, trust, and growth. In a sector where agility and credibility define long-term relevance, that may be the most strategic investment a financial institution can make.
References
https://www.eba.europa.eu/activities/direct-supervision-and-oversight/digital-operational-resilience-act
https://www.federalreserve.gov/paymentsystems/fednow_about.htm
https://finance.ec.europa.eu/consumer-finance-and-payments/payment-services/payment-services_en
https://www.bcg.com/publications/2025/risky-times-call-for-innovation-in-bank-compliance