Five Steps to Legacy IT Modernization in Banking & Financial Institutions

Five Steps to Legacy IT Modernization in Banking & Financial Institutions
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Nearly all services and products provided by financial institutions are technology-based, while the introduction of Open Banking and PSD2 regulations, aggressive evolution of mobile banking, and the so-called ‘mainstreamification’ of fintech applications like Dozens by Project Imagine make information technology even more mission-critical.

Meanwhile, the overwhelming majority of banking systems are dating back to the 1970s or 1980s, and these obsolete technologies at the very core of the financial services (FS) industry are the feet of clay. These days, market old-timers, fraught with old legacy systems and infrastructure, are trying desperately to contend with born-digital startups with agile software architecture built from start to finish. However, as innovative technologies, such as Artificial Intelligence and Machine Learning, Data Science, Digital Twins, or open APIs, morph into the mainstream, it is becoming prohibitively difficult for incumbents to maintain their original positions.

What Is a Legacy System in Software Engineering and Why Is It Important?

In simple terms, a legacy banking system is an outdated software that is essential for day-to-day company operations and is in use by the employees. It still meets the requirements it was initially built for, but it cannot support your growth. Why an IT system becomes a legacy system? — Most obsolete computer software products are powered by older technologies that are often too overstructured and rigid to interact with newer components, speed up time-to-market, or sustain your expansion to the new markets. On top of that, they aren’t able to integrate the latest improvements, such as cybersecurity developments or cloud storage advancements, which are critical for smooth software launch and efficient performance.

Toward Progressive Platforms or Why Modernize Legacy Systems?

The ever-increasing customer expectations for digital services and strong competition are forcing financial organizations to reevaluate how their IT products are developed, run, maintained, and delivered. In most cases, incumbent banking organizations start considering legacy modernization due to the following reasons:

  • to streamline complex operations, all while bringing down costs and enhancing user experience;
  • to operate in a more flexible and dynamic manner;
  • to adopt new technologies, benefit from the latest capabilities, and save expenses;
  • to mitigate risks and improve security.

If to talk numbers, the main drivers of legacy software transformation efforts in the financial services sphere according to the Technology Trends Survey are:

  1. Operational improvement - 54%
  2. New functionality - 46%
  3. Regulations and compliance - 46%
  4. Cost optimization - 43%
  5. Business and IT alignment - 39%

Nearly all legacy applications at financial institutions lack the flexibility to deliver the experiences that customers expect in the digital age. At a time when the need for speed, functionality, and bandwidth grows, the challenge of trying to go forward with legacy core banking systems becomes even more critical, leading to financial losses, software crashes, degradation, release delays, and wasted budget.

Apart from the reasons for core modernization that we’ve already mentioned above, we should also add the shortage of developers skilled in older languages like COBOL or Natural. Most universities no longer hold courses on these legacy programming languages, and today’s employees have little to no experience and theoretical skills to utilize them. This situation has driven up demand for legacy engineers or, on the contrary, intensified COBOL modernization.

While some banking institutions globally assume the “wait and watch” attitude, a few reputed organizations have started to implement their IT infrastructure modernization strategies. A few years ago, Capital One nailed down a deal with Amazon Web Services (AWS) and hunkered down to the migration of their obsolete apps to the cloud. BBVA Compass hired Capgemini to assist with a comprehensive digital transformation and invested over €2B in legacy system modernization. Additionally, the company acquired several fintech startups, like Simple for $117M, and partnered with innovative firms, like OnDeck, to take customer experience to the next level. Goldman Sachs has already introduced its fintech branch, Marcus, to offer individual loans and continues its expansion to other services and products.

These are just a few examples of modernization with mixed approaches and different results since some companies opt for fintech apps and build a so-called digital interface, while others tap into modern tools like robotic process automation (RPA) to bring down spending and grow customer engagement.

Pathway to the Future: Legacy Modernization Benefits

In the 2018 CIO Agenda Survey, Gartner found that C-level officers in the banking and investment services industries are more interested in digitalization (number one priority for 26 percent of the interviewed) than CIOs from other industries (17 percent). And even though business systems modernization can become a permanent journey, the final output is many times the amount of investment.

The top three assets that we’ve casually mentioned earlier are cost reduction, risk management, and revenue generation. However, based on our past experience, we’d also name the fourth — customer experience. We’ll analyze all the above advantages of modernization in more detail, proceeding from the Dashdevs hands-on industry experience.

Cost reduction

Legacy software maintenance and enhancement are expensive and cumbersome, and it doesn’t get any better over time. Our experience has shown that introducing modern platforms to the back office companies can cut down their IT operating expenses by 20 or 30 percent on average, depending on the type of tasks. Combining several independent applications and rationalizing software solutions can save up to one-third of upkeep costs, as well as cut down future support and integration expenditure.

Additionally, there are even more cost-saving technology and modernization opportunities that forward-thinking business owners often opt for. We’re talking about robotic process automation (RPA) for legacy payment system transformation to eliminate the need for manual transaction reviews and thus make banking processes less laborious and time-consuming.

Risk management

Keeping primary business software in proper operative conditions requires unceasing efforts and significant involvement, while most legacy systems in banking lack appropriate documentation or skilled Assembler/COBOL developers. And with it diminishes the ability of financial institutions to maintain their platforms effectively.

Moreover, most out-of-date apps have a monolith architecture meant for everyday batch processing, but that doesn’t satisfy the requirements of the current technology-driven, dynamic environment. Today new products are expected to mitigate such risks, so they are built with a view to trending and future technologies, like Data Science, cloud, or AI.

Revenue generation

Since existing and emerging technologies, such as open APIs and Beacons, considerably shorten the time required to release new services or products, plenty of cases for application migration, and modernization originate from new revenue opportunities. Application Programming Interfaces empower firms to interact with external companies and partners and combine their capabilities to offer new solutions. Beacon technology allows business owners to interact and engage their potential customers via mobile devices. Such approaches can give rise to absolutely new revenue streams and innovative business models that would be hard or even impossible to seize with their legacy systems.

Customer experience

Good user experience is vitally important in today’s highly-competitive digital world. Though in most cases, legacy core banking systems don’t act as direct customer interfaces, they make main services available on the front-end. Unfortunately, too often, interfaces turn out to be confusing, buggy, or unresponsive, so they disappoint customers and make them opt for competitors. Introducing intuitive and attractive UI companies can improve customer satisfaction, foster loyalty, and thus boost their revenue. Additionally, updating the platform companies can speed up the execution of financial activities.

Legacy Modernization Challenges and Risks on the Road to the Future

Core banking modernization activities show tremendous promise, but they can go down in flames if held by inexperienced IT partners/development teams or started without a detailed roadmap, coherent vision aligned to business situation, or thorough risk management strategy. Whatever the scope is, every legacy application modernization process comes with risks and barriers that should be discovered and managed as soon as possible. That implicates:

  • Regulatory compliance and legal risks: Considering the boom of GDPR, PSD2, and Open Banking, this item can hardly be ignored, no matter if you casually update your aging platform or unleash your entire legacy system replacement strategy. Working on financial services modernization check local regulations and global compliance requirements, or hire a qualified tech consulting company to guide you through this process without costly consequences.
  • Account management hazards: Banking kernel platforms empower many essential client-side services, such as money transfers or capital investment, and they must operate trouble-free and twenty-four seven. Considering legacy system modernization approaches, keep in mind that this type of software should be handled carefully, with rigorous testing, and comprehensive instructions for replacement.
  • Rival priorities: Depending on the scope and scale of legacy software modernization, this initiative can disturb the execution of other economic and business priorities for months. This fact makes it unpopular among stakeholders and sponsors, who would prefer to invest money in other short-term revenue-generating activities or their own groundbreaking projects. Evaluate your potential ROI from IT legacy modernization and make your corporate objectives and priorities clear across the whole management team.

The truth is that these barriers of legacy technology modernization are not insuperable if handled with the appropriate knowledge, understanding, and planning. The scale of risks is less than the implications of postponing or ignoring the need for core application modernization. If the latter is not settled in due time, it can transform into a major threat to the future of your whole business.

It’s Time to Start: Core System Modernization Approaches and Options

We’ve already defined a legacy system in software engineering and covered the most common benefits and challenges of IT transformation. Obsolete banking software is usually seen as a stumbling block for new business initiatives, and when a watershed moment is reached, it’s important to select a feasible application modernization strategy to prevent big losses.

  • Complete transformation: A company goes back to the drawing board and creates the core system with the use of new technologies and modern architectural concepts that will stay relevant in the years ahead. Total legacy system migration leads to the retirement of the aging software.
  • Incremental replacement: With this iterative approach, companies introduce new technologies slowly but steadily, all while keeping risks and impacts of change under control. Typically, a new component is embedded into a legacy app in the form of a stand-alone solution. The remaining portion of the system is still fueled by older technology, but over time obsolete software elements are substituted with newer ones, and gradually, the whole system is updated. Most large-scale enterprises opt for phased development as a modernization strategy because it is a low-risk and cost-effective way to reconstruct the entire software.
  • Duct tape method: In this case, the existing system remains unchanged, while to solve a particular issue and make some smaller updates, software engineers apply new technologies and tools. The development of a modern application that will be hooked to the core system to bridge the functional gap is one of the most common modernization examples for a duct tape strategy.
  • Window dressing approach: If companies have enough resources to maintain older technologies or the tech stack is not that ancient, they can modernize the existing software. Typically, development teams update the design, offer minor improvements, simplify business operations, or update systems that cover regulatory compliance functions. This initiative can postpone the need for a total app modernization, providing stakeholders with enough time to choose a reliable digital transformation service provider, and create a comprehensive business strategy.

The high-level goal of each legacy system modernization strategy described above is to manage or even eliminate existing and future risks. If financial institutions opt for loyal tactics, like improvement of the existing system, they should be ready to invest in their upgrade efforts further down the line.

Application Modernization Best Practices and Checklist for Business Stakeholders

Legacy modernization services require accurate planning and well-orchestrated execution, so you should have absolute confidence in your engineering team or your information technology partner. Below you can find our checklist with five steps to effective enterprise IT modernization.

#1 Analyze and assess the actual state of your dated banking systems.

Legacy software shouldn’t be solely associated with the term ‘outdated’ because, in fact, it is a tech solution that restrains corporate innovation and growth. That’s why it is critical to analyze all applications in place and unveil the existing and potential problems. The evaluation should be coherent and detailed, from architecture and code base to look and feel of a solution, with reference to your future business goals.

#2 Define and prioritize your corporate goals.

There can be several objectives attributed to legacy platform modernization, but in practice, it’s more like a combination of purposes associated with customer experience, cost savings, business agility, and risk management. All these must be aligned with the company’s willingness to change and venture.

#3 Choose a suitable technology modernization strategy.

Based on the results of assessment and prioritization, select a legacy modernization technique that will be consistent with your expectations and will ensure a tangible outcome. It must be said that if your application solves particular tasks or you need an opportunity to extend its functionality down the road, custom software development services can help you accelerate the process without compromising the quality.

#4 Choose a technology stack and follow software engineering best practices.

To see the positive effects of modernization, make sure that your software development team applies a reputed and forward-thinking web or mobile technology stack. The selected technologies and tools should thoroughly comply with the product’s unique characteristics and your business objectives. Work closely with your in-house engineering team or consult with an experienced financial services consulting company. A sufficient tech stack serves as a solid foundation for your reliable, functional, and powerful product.

#5 Elaborate a comprehensive post-release strategy.

To prevent the same problems that have made you re-develop your existing system, adopt software engineering best practices across your IT department. For instance, clean and readable code, component architecture, and comprehensive project documentation will make your software easily testable, maintainable, and scalable in the long run. Your employees may need some time and assistance to get used to the new application, so be ready to invest in workshops to speed up the process and boost their performance. On top of that, don’t forget about timely system updates; otherwise, you may end up planning another legacy software migration too soon.

Conclusion

No matter if we’re talking about the entire system or specific payment application modernization, we should emphasize that this process is multi-faceted, tedious, and high-risk. Business owners should be aware of the challenges and risks associated with both addressing and neglecting this technical debt. And more importantly, they shouldn’t postpone some mission-critical upgrading efforts since the consequences can be too drastic. By continuing to utilize obsolete software solutions, you hinder and then terminate innovation, bring your progress to a standstill, and give your competitors the wall.

Our experience proves that risks associated with execution can be easily managed or prevented with thorough planning, including analysis of actual capabilities and their correlation with the core legacy modernization trends and strategies to obtain the desired results in time and budget. Moreover, it doesn’t really matter how many years you’re in the business and how old your system is since too often companies can face the need for transformation even after one or two years on the market.

If you have questions regarding legacy app modernization or software development consulting services, feel free to contact us and our managers will get back to you shortly.

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