How Modular Architecture Simplifies Compliance: A New Approach to Licensing, Audits, and API Control

PayTech companies today navigate a complex web of regulations across multiple jurisdictions. From consumer data privacy laws to anti-money laundering directives and open banking mandates, compliance is both critical and challenging. 

Monolithic vs. Modular Architectures in PayTech

A key but sometimes overlooked factor in meeting these challenges is the design of a company’s technology architecture. In particular, modular architecture – often implemented via microservices – has emerged as a strategy for simplifying compliance management and increasing resilience. By contrast, legacy monolithic systems (where all functions are tightly integrated in one codebase or platform) can impede agility and make regulatory adaptation difficult. In this article, we will explore how a modular approach impacts regulatory licensing, audit readiness, and API control, comparing it with monolithic architectures.

In software terms, a monolithic architecture is a unified system where all components (such as user interface, business logic, and data handling) are part of one interconnected application. Early PayTech platforms and traditional bank systems often followed this approach – for example, one large application might handle customer onboarding, accounts, payments, and reporting all together. Monoliths have the advantage of initial simplicity and straightforward development since everything resides in one place. However, they tend to become unwieldy as systems grow. Any change (to add a feature or update a compliance rule) requires rebuilding and redeploying the entire application, and a flaw in one part can affect everything. Such traits introduce maintenance challenges and scalability limits that can directly impact compliance agility.

In contrast, a modular architecture breaks the system into discrete, loosely coupled components or services. A popular form of modular design is microservices architecture, where each service encapsulates a specific business capability (payments processing, KYC verification, transaction monitoring, etc.) and communicates with others via well-defined APIs. Each module/service can be developed, updated, and scaled independently. In a PayTech context, for example, there might be separate modules for customer onboarding, customer lifecycle management, payment processing, fraud detection, reporting, and so on. This separation of concerns means that one module can change or fail without bringing down the whole system, and new features can be added as new modules without reworking the entire platform.

When it comes to compliance, these architectural differences are significant. Monolithic systems often hard-code business rules (including compliance checks) within a large codebase, making it laborious to update processes to meet new laws, regulations, products or services. Modular systems, by contrast, allow targeted changes – you can update the compliance-related microservice (say, a sanction screening service) without disrupting other functions. 

Moreover, modular designs encourage clear API boundaries and documentation between services, which aligns naturally with the need for transparency and control in regulated environments. As we will discuss, a modular approach offers several advantages: it aligns well with regulatory licensing structures (for example where PayTech provides both fiat and crypto assets payment processing), improves audit readiness, and strengthens API management and data governance for compliance.

Regulatory Licensing and Modular Architecture

Financial regulations often require specific licenses for different activities – for example, e-money licenses for stored value, virtual asset service provider licenses for stablecoin settlements, payment institution licenses for payment processing and acquiring, money transmitter licenses for money remittance, etc. In a global context, a PayTech operating across jurisdictions may need to comply with a patchwork of licensing regimes. A modular architecture can simplify this by aligning system components with regulatory boundaries. For instance, a PayTech might separate its currency exchange operations into one module and its payments processing into another. This separation is not only logical for development but also helps with licensing: if a certain module performs a regulated activity, it can be managed (and if necessary, isolated or turned off) according to the regulatory requirements of each country. 

By designing products with modular components, PayTech companies can even tailor specific features or layers to meet the regulatory demands of individual regions – enabling a core system to reuse general features while swapping in local compliant modules where needed. This approach was highlighted in a multi-jurisdictional compliance framework that emphasises region-specific configurations while maintaining centralized control.

Consider the European Union’s PSD2 open banking mandate and similar open API requirements in the UK: Banks and PayTechs had to expose certain services (like payment initiation and account data) to third parties. Those with legacy monolithic cores struggled, often needing extensive retrofitting to meet these requirements. In contrast, a firm with a well-defined API layer and modular backend could more readily expose only the required functionality via an API gateway, without risking the integrity of the whole system. This flexibility helps avoid compliance violations that could “jeopardize one’s operating license,” to borrow a concern often raised for PayTechs expanding geographically.

Another angle is partnering and Banking-as-a-Service (BaaS) models. Many PayTechs work with licensed banks or providers for certain services (e.g., a PayTech app might rely on a partner bank for custody of funds or e-money institution for clearing through certain methods and offering e-wallets). A modular system can integrate such third-party services as interchangeable modules, where services are differentiated and routed depending on the payment methods, whilst the underlying logic remains perfectly aligned within. If a regulator requires using a locally licensed entity for a certain function in their jurisdiction, the modular design makes it easier to slot that in and expand options available to the customers through the system. 

By keeping regulatory-sensitive functions compartmentalised, organisations can more easily demonstrate to regulators that each licensed function is properly walled-off and controlled. In short, modular architecture provides a clearer mapping between what the system does and who is authorised to do those things, simplifying the task of showing regulators that you operate within your licensing permissions.

Audit Readiness and System Design

Regulatory compliance isn’t just about getting a license – it’s about continuously operating under oversight, which means being audit-ready. Whether it’s a routine compliance audit, safeguarding audit, or an on-site inspection by regulators, PayTechs must be able to produce evidence of controls, data integrity, and proper handling of customer’s data, funds, and transactions. 

Here, modular architecture offers significant benefits. Each module or microservice can implement its own granular logging, access control, and data encryption measures, tailored to the sensitivity of its function. For example, the payments service can log every transaction and authorisation detail, while the user account service separately logs login attempts and profile changes. This fine-grained audit trail at the service level means that when an audit occurs, specific data and logs can be extracted without exposing or entangling unrelated information. It also reduces the “blast radius” of any audit finding – an issue discovered in one module (say inconsistent KYC data handling in a customer service module) is likely isolated and easier to fix without overhauling the entire system.

Modular systems also support the principle of least privilege more naturally: each service or component only has access to the data and resources necessary for its function. This containment is a security boon (limiting the attack surface) and a compliance aid – for instance, it helps in GDPR compliance by ensuring that personal data isn’t unnecessarily replicated or accessible everywhere. If an auditor asks “who has access to customer X’s full data?”, in a well-architected modular system the answer might be limited to just a couple of services (and their teams), versus a monolith where potentially the entire application’s code had access.

Another aspect of audit readiness is testing and change management. In a monolithic architecture, deploying changes (even minor compliance updates like a new reporting field) requires a full application deployment, often with lengthy testing of unrelated features to ensure nothing breaks. This slows down the response to regulatory changes and can lead to periods of non-compliance if updates can’t be developed, tested, and deployed quickly. Modular architecture, by enabling independent deployments, allows for faster iteration. Teams can push a compliance update in one microservice (for example, updating an AML rule engine module to include a new sanction list) without redeploying the whole platform. Combined with modern DevOps practices, this means compliance patches or enhancements can be delivered continuously – a concept sometimes called continuous compliance. 

Some PayTechs even integrate compliance checks into their CI/CD pipelines, automatically verifying that new code doesn’t violate security or data handling policies. The result is a system that is “audit-ready by design,” because it continuously maintains compliance evidence and can be quickly adapted as regulations evolve. As one PayTech architecture guide notes, it’s crucial to choose an architecture that allows easy auditing, monitoring, and compliance reporting from the outset. Modular architecture answers this need by design – each component can be instrumented and monitored on its own, and compliance reporting tools can aggregate data from the modules as needed.

API Control and Data Governance

In a modular (especially microservices) architecture, APIs (Application Programming Interfaces) are the glue holding the system together. Every module exposes APIs for other services (or external clients) to interact with. This API-centric design can significantly enhance compliance and data governance. Firstly, having a well-defined API gateway or management layer means you can enforce security policies uniformly across all service interactions. Authentication, authorisation, encryption standards, request throttling, and input validation can all be handled at the API level, ensuring that every module-to-module or external call meets security and compliance requirements. 

For example, an API gateway can help to enforce strong customer authentication for all calls initiating funds transfers, helping comply with PSD2’s requirement for Strong Customer Authentication in Europe. Similarly, it can ensure data going out complies with privacy rules – e.g., masking or omitting personal data fields for APIs used by partners, to respect data minimization principles of GDPR.

API control also means better visibility. With central API logging and monitoring, a PayTech can trace who accessed what data and when, which is invaluable for compliance audits or investigating incidents. 

In a monolithic system, internal function calls might not be logged with the same rigor as API calls, making it harder to reconstruct a timeline of events. But in a modular system, inter-service API calls are often treated like external calls – authenticated and logged. This creates an automatic audit trail of data flow and usage. In the context of open banking, having an API management solution is practically mandatory: regulators expect banks and PayTechs to manage third-party access, which includes providing sandboxes, monitoring usage, and revoking access if needed. 

A modular platform with a dedicated API layer is well-suited to these tasks, whereas a monolithic core often requires an API facade to be bolted on, which can be brittle. Indeed, many banks undergoing digital transformation note that their monolithic legacy systems hinder API adoption, necessitating core modernisation. PayTech firms that started with modular, API-led architectures had a head start in complying with open API initiatives as their systems were already structured to support secure, scalable API exposure — though full compliance still required meeting mandated standards, certifications, and security protocols..

Moreover, API control ties into data governance – understanding where sensitive data travels. Many Asian regulators (such as the Reserve Bank of India and others) have issued guidelines on local data storage for payments; a cloud-native, modular approach makes it easier to comply by deploying modules in the required geography and directing relevant API traffic there, whereas a monolith might force duplication of the entire stack in each region to achieve the same end. In a microservices setup, data flows are more explicit (via service interfaces) and can be documented. If a regulation dictates that certain data cannot leave a region, a PayTech can deploy specific services in-country and ensure only region-specific APIs are used for that data. By controlling APIs, PayTechs control data residency and sovereignty. 

In summary, modular architecture enforces a discipline of API governance that dovetails with compliance needs: every integration point is controlled, monitored, and can have compliance rules baked in (like checking user consent tokens, verifying transaction limits, etc.). It converts what could be an opaque internal process in a monolith into a set of transparent, manageable interactions in a distributed system. This not only simplifies demonstrating compliance (you can point to specific services and their API documentation to show how compliance is enforced) but also reduces the risk of non-compliance by catching violations at the boundaries.

Global Regulatory Considerations

Regulatory regimes around the world share common goals (protect consumers, ensure financial stability, prevent illicit finance) but achieve them through different rules and enforcement styles. For globally-operating PayTechs, adapting to this diversity is not optional, but essential.

A modular core architecture enables this adaptability. Each authorised entity within a PayTech group can deploy its own separately hosted instance in its jurisdiction of operation, ensuring compliance with local data residency and regulatory requirements. While data and payment processing remain strictly confined within each instance, the underlying core payments platform remains unified by streamlining R&D efforts and drastically reducing development overheads.

This separation does not come at the cost of efficiency. Where legally permitted, data sharing between group entities is facilitated through secure integration mechanisms designed with data minimisation and regulatory boundaries in mind. As a result, inter-entity collaboration – for example, where one entity acts as a settlement or clearing partner for another – becomes a matter of hours instead of months, a sharp contrast to the delays common in disjointed or monolithic systems.

In the EU and UK, regulations have strongly pushed banks and PayTechs toward modular, API-driven services. The EU’s PSD2 and the UK’s Open Banking initiative (stemming from a 2017 CMA order) explicitly require financial institutions to have open APIs for certain services. Many European banks had to carve out API layers on top of aging cores, but newer PayTechs designed with modularity thrived by quickly plugging compliant API modules into their platforms. Data protection laws like GDPR also influenced architecture: companies needed to isolate personal data and enforce consent and deletion across systems. 

A modular design helps because the “personal data handling” can be concentrated in specific services that are easier to audit for GDPR compliance. For example, a PayTech could have a dedicated data profile service that knows how to purge or anonymise user data on request – implementing GDPR’s Right to Erasure – without that logic being tangled through a monolith. European regulators also require extensive reporting (e.g., MiFID II for trading data, or various central bank reports), which modular systems can facilitate by having separate reporting services that compile data from various modules. This separation means that changes to transaction processing logic don’t accidentally break a compliance report, since the reporting module is distinct (but fed via APIs the data it needs).

In the United States, the regulatory landscape is fragmented (federal agencies like the CFPB, OCC, SEC, etc., plus 50 state regulators for certain activities). Compliance often means building to the most stringent common denominator or toggling features state-by-state. A modular architecture lets U.S. PayTechs enable or disable modules depending on state. For instance, if one state doesn’t allow a particular crypto trading feature, that microservice can be turned off for users in that state while remaining active elsewhere. 

Similarly, if a state regulator has a unique reporting requirement, a small module can be created to handle just that state’s report, rather than complicating a national system. This agility was practically demonstrated by some payment companies who, when new state-by-state money transmitter rules came in, quickly updated their compliance modules separately from their main product code. Additionally, many U.S. PayTechs engage in partnerships (e.g., a PayTech offering bank-like services via a sponsor bank’s license). A modular system can plug into a partner bank’s systems more easily, exchanging data through well-defined APIs (e.g., for core banking functions), which helps satisfy both the PayTech’s and the bank’s regulators that data sharing is controlled and auditable.

A modular design can ease this by sharing only the non-regulated pieces (like UI code or certain algorithms) while completely separating country-specific regulated components. More broadly, across jurisdictions, regulations change frequently (new AML rules, new customer protection requirements, etc.). An architecture that allows rapid changes to isolated components means a globally operating PayTech can comply with a new rule in Region A without inadvertently causing downtime or issues in Region B – essentially, compliance by compartmentalisation.

It’s worth noting that modular architecture alone is not a silver bullet; organizations must still invest in good governance and RegTech solutions. But it provides the foundation to adopt RegTech tools more easily. For example, if a new automated reporting tool comes out, a modular system can integrate it as a service or API, whereas a monolithic system might require custom retrofitting. 

Industry trends show that institutions are looking for “unified solutions” to manage cross-jurisdictional compliance, and modular, API-friendly architectures are better suited to plug into such solutions. Cloud-based compliance services can be attached to different modules to scan transactions, check configurations, etc., demonstrating the advantage of an open, modular platform versus a closed monolith.

Benefits and Drawbacks in the Compliance Context

The benefits of a modular architecture for compliance can be shortly summarised as agility, isolation, and clarity. Agility comes from the ability to update parts of the system independently – crucial when regulatory deadlines loom or quick fixes are needed. Isolation comes from the compartmentalisation of functions; problems in one area (say, a bug in the fee calculation module) don’t automatically cascade into a compliance failure in another, and security can be tightened around the most sensitive pieces. Clarity is a byproduct of having defined interfaces – it’s easier to document how data moves and where controls are applied, which makes explaining the system to auditors and regulators much more straightforward. 

Each microservice can even be subjected to its own compliance certification or audit. For example, a payments microservice handling card data could be PCI-DSS certified on its own, without the entire platform needing PCI certification scope, if other parts never see card details. This modular compliance scoping is a big advantage in reducing overhead. Additionally, modular design inherently supports “compliance by design” principles. When building each module, teams can embed necessary controls (as we saw with the API security or logging examples) from the start, rather than trying to retrofit a giant application with new compliance layers.

There are, however, some drawbacks and challenges to consider. A microservices approach introduces more complexity in orchestration – dozens of services, each with their own logs and databases, can be a challenge to manage. If not done properly, the very advantage of distributed responsibility can become a disadvantage: teams might lose a unified view of compliance if monitoring isn’t centralised. For instance, a monolithic system might have one log file to check for all compliance events, whereas a poorly managed microservices system could scatter that information. This means PayTechs need robust monitoring and log aggregation across modules to ensure nothing slips through the cracks. Modular architecture with different microservices can also be a costly solution, posing a potential challenge if there are budget constraints present – especially for smaller PayTechs.

Moreover, microservices demand more in terms of DevOps and automation to truly be effective; smaller startups may find this overhead difficult initially. In such cases, some opt for a modular monolith approach – structuring the code into modules but deploying as one unit – which can be a stepping stone. A modular monolith still benefits from logical separation and can later be broken out into services when needed. The key is to avoid the worst of both worlds: a tangled monolith with no clear interfaces and a fragmented microservices network with no governance. Good design and documentation are imperative.

Comparatively, a monolithic architecture’s simplicity can be beneficial in early stages – there’s less infrastructural complexity, which means fewer points of failure or fewer places to enforce security. For a very small, single-market PayTech, a monolith might be easier to get off the ground and even to secure initially (one codebase to harden, one deployment pipeline).  

Some regulators, especially in the past, were more accustomed to monolithic core banking systems and might expect certain controls at a system level. So, a PayTech must ensure that moving to microservices doesn’t confuse regulatory oversight. This is usually addressed by clearly showing the regulator a mapping of controls to each service and how the whole risk management picture is maintained. In practice, regulators have grown more comfortable with distributed architectures as long as the company can demonstrate control and monitoring.

To highlight a drawback: modular systems rely heavily on network communication (API calls). This means performance issues or outages in one microservice (or the network between them) can cause system issues if not properly designed with fallbacks. In a compliance context, that could mean if a central authentication service fails, other services might be unable to perform necessary checks and have to stop processing (to avoid a breach of rules). 

Monoliths don’t have that inter-service dependency – everything being in one process can simplify failover logic. Thus, building a resilient modular system that is compliance-resilient (i.e., doesn’t accidentally violate rules during a partial outage) requires careful planning, such as circuit breakers and graceful degradation strategies. Fortunately, techniques exist (and many PayTechs use them) to ensure high reliability in microservices, but it’s a complexity to manage. 

In terms of audit and oversight, monolithic systems present one big target for auditors – which can be both easier (one system to understand) and harder (so complex it’s opaque). Modular systems present many small targets – easier individually, but an auditor must understand the interactions. Again, documentation and a solid compliance architecture blueprint are essential to reap the benefits of modularity in an audit.

How Baseella Can Support Modular Compliance-Ready Architecture

In the evolving regulatory landscape, PayTechs need systems built for adaptability, observability, and control – all at scale. Baseella’s architecture and toolset are purpose-built to support exactly this need.

Baseella empowers financial institutions with a modular, microservices-based foundation where each service operates independently with its own database, making it easy to isolate and scale specific functions. This is especially critical for compliance-ready systems, as changes to one service (e.g., AML screening or KYC verification) can be made without impacting the rest of the platform. Using robust RESTful APIs and a Federated GraphQL layer, Baseella ensures clean, well-documented service boundaries — a crucial component of both licensing segmentation and audit preparedness. 

Additionally, Baseella’s cloud-native infrastructure leverages Kubernetes and leading cloud providers (AWS, Azure, Google Cloud) to guarantee high availability and rapid deployment. Its integrated compliance stack — including risk scoring of the customers and transaction, transaction monitoring rules, PEP, adverse media, sanctions screening, on-chain analysis of cryptocurrency transactions, and customisable rules engines — enables firms to meet regulatory obligations across multiple jurisdictions. Combined with real-time risk scoring and a modular chart of accounts, this architecture provides financial institutions with the technical flexibility and governance structures needed to remain audit-ready and compliant-by-design. 

Conclusion

Across global PayTech markets, the trend is clear: the pace of regulatory change and the demand for innovation are not slowing down. Firms need architectures that can keep up. Modular architecture, with its loosely coupled services and API-first approach, has proven to be a powerful enabler of compliance. It simplifies adapting to new regulations by localising changes, makes it easier to maintain continuous audit trails and strong security perimeters, and provides the flexibility to configure systems for different jurisdictions without starting from scratch. By contrast, monolithic systems often struggle with these demands, as changes ripple through a tightly-knit codebase and integrations are harder to control.

However, implementing a modular architecture is not a one-time fix; it requires ongoing investment in DevOps, monitoring, and governance. PayTech companies must pair their modular design with a culture of compliance in development – embedding rules in code, automating checks, and staying vigilant about each service’s role in the broader regulatory landscape. When done right, the payoff is substantial. 

Modular PayTech platforms can confidently enter new markets knowing they can plug in the necessary compliance components. They can more readily furnish regulators with detailed information, because their systems were built to surface data and controls at a granular level. And they can embrace innovation (like adding a cryptocurrency trading module or an AI-based credit scoring service) without endangering their core compliance, since new modules can be isolated and rigorously tested before integration.

In an industry-focused view, modular architecture aligns with the very nature of financial regulation – which often compartmentalises risk and oversight by business line and jurisdiction. It enables a PayTech to “build for change”, creating a compliance advantage in a world where rules and expectations evolve constantly. While no architecture eliminates the hard work of compliance, choosing a modular approach simplifies the journey, allowing PayTech innovators to focus on delivering value to customers with the confidence that compliance can keep pace. 

The future of PayTech is likely to be both more heavily regulated and more technologically distributed; modular architecture is a bridge between these two realities, ensuring that as we build the financial services of tomorrow, we do so on foundations that are as adaptable and accountable as the environment in which we operate.