Legacy modernization will lead the future of core banking

Fintech has taken the banking industry by storm. The influx of innovative technologies, cloud banking, and sophisticated processes have led the traditional and incumbent banks to rethink and realign their way of operating. Fueled by the 2020 pandemic, there is a growing need for the modernization of core banking systems to support the ‘new normal’. The modern core banking systems require better agility, flexibility, and scalability to respond to evolving customer demands. Traditional banks have pushed themselves to meet the inherent capabilities of the new normal. To remain competitive, the future of successful enterprises relies on modernizing core banking systems.

Ensuring business continuity by embracing internet banking, in all its glory, is just a small and hurried step toward digitization. But to add value to the digital revolution, enterprises will require a long-term vision, strategy, and approach for the systemic migration and adoption of advanced technologies. The biggest challenge for banks is overcoming the limitations of legacy systems in a microservices-era.

Before we address the need for an expert service provider for a successful transformation to advanced digital systems, it is imperative to comprehend the key features of modern core banking along with its benefits.

Why Banks Need to Modernize Their Legacy Systems?

Core transformation can no longer be ignored by financial institutions that are still reliant on legacy systems. While the high costs of transformation have held back most organizations, the benefits of legacy modernization far outweigh them. Common motivations for legacy modernization include:

• Marketplace relevance: To enable digital competitiveness, core systems should have the capabilities to support myriad digital endeavors. Today, these digital capabilities are bundled with new and emerging technologies of artificial intelligence (AI), machine learning (ML), blockchain, and others to stay ahead of the competition. For enterprises, market relevancy is just not about being digitally-abled, but to be able to capitalize on their digital capabilities.
• Better use of human resources: Legacy software and systems are known to be complex environments that are difficult to manage, navigate, and understand. The outdated UI does not support the user-friendly and intuitive interfaces that the new-age employee is used to. Getting used to this setup would require additional training - increasing costs and effort. Modernizing your legacy system will save time, reduce dependency on expensive talent for legacy technology skills, and optimize cost-per-hire.
• Improved services: Influenced by eCommerce and other retail sectors, the modern consumer has come to expect the same flexibility, ingenuity, and omnichannel experience from their financial providers. The slow, often crashing, and poorly performing legacy systems fail to deliver the agility and scale that modern processes demand. Modernizing the system allows for process simplification, personalized user experiences (e.g., AI/NLP-based chatbots), and allow for better cross-selling of products – leading to enhanced service levels, product innovation, and customer satisfaction.
• Enhanced security: Aging and outdated systems are vulnerable to cyberattacks and malicious activities. Most legacy systems no longer receive vendor support and miss out on critical security patches, upgrades, and new functionalities. For instance, BlueKeep is a notable vulnerability identified in NT-based Windows operating systems. Although most organizations have stopped Windows XP or 2000 usage, most still rely on Windows 7. Similarly, Windows systems are also vulnerable to SMBGhost or CoronaBlue; allowing malicious players to remotely take over systems. Such vulnerabilities leave your enterprise open to security breaches that can be very costly to banks.
• Highly cost-efficient: Legacy systems are notorious for rising hidden costs for an enterprise. For instance, in 2019, the US Federal government spent 80 percent of its IT budget on maintenance and operations or around $337 million of taxpayers’ money. Modernizing digital core banking systems can significantly reduce operational costs and service delivery costs.
• Enhanced optimization: Basing strategies on scaling economies and commercial platform vendors’ capabilities improve user productivity enabling better optimization. Modernizing legacy systems also enables the banks to adopt “configure model” instead of “customize model”, thus, eliminating technical redundancies.
• Becoming future-ready: The future of banking is defined by emerging technologies, dynamic business models, and rapidly changing customer expectations. To be future-ready, banks need to drive system transformation today. The push for open banking initiatives also highlights the need for a modern system that supports user-experience centric core banking system requires a microservices-based architecture and robust API framework for third party integration. Having up-to-date digital systems will further help in reasonable and easy-to-maintain upgrades in the future.

The Big Question: How to Modernize Core Banking?

Addressing the challenges of the near future and the next normal would require a thorough assessment of the current core banking platform and external environments. Modernizing requires a disciplined and well-thought approach. Banks will need to understand whether a full replacement or a systematic upgrade will offer a better value-to-risk ratio.

• Full replacement: Immediate replacement is not only too risky but can be quite expensive and time-consuming and should only be opted in those situations of sudden regulatory imperatives or obsolescence. The biggest catch in full replacement is that the benefits or any internal issues can only be realized or tracked when the migration is complete, and the legacy system software is de-commissioned.
• Progressive migration: The most popular strategy amongst banks, also known as phased migration, undertakes a systematic and steady migration approach. It allows the banks to keep working with legacy systems for a considerable amount of time while simultaneously building a modernized architecture to be smoothly introduced and transitioned into.
• A greenfield banking approach: Developing completely new technologies in new customer-centric environments without any constraints based on the legacy systems are a few of the many building blocks of the Greenfield approach to driving the digital transformation of the banks. It is becoming the most effective alternative for traditional banks to test the waters and then adopt the most suited technologies.

Core banking modernization best practices

• Assess the company’s technical debt: Banks should be able to closely identify and calculate their technical debt so that they can properly prioritize the debt and its impact on the legacy system processes.
• Identify the organization’s objectives and examine risk tolerance: The banks, when going for legacy system modernization, must assess various business variables like customer satisfaction levels, modernization objectives, cost savings, business continuity, and risk management. These thorough assessments help to provide context for the selection of the most efficient and effective modernization approach.
• Choose futuristic solutions: The technological advancements are taking place at an unprecedented scale, requiring organizations to be agile in the adoption of future technologies. For this, it is imperative to build solutions that support future adaptability.
• Extensively define the post-release strategy: One of the most crucial modernization practices is to create a follow-up plan that includes successful training of employees, ensuring systematic and streamlined process, timely update schedule, and undertaking other maintenance tasks.

Conclusion

As the world adjusts to the new normal, the solution to legacy systems is the modernization of core banking systems. Banks looking to enhance their IT efficiency are turning to innovative technologies of AI/ML, cloud computing, and the internet of things (IoT). The integration of new technologies unlocks the growth and revenue potentials of banks while building a loyal and satisfied customer base. It also enables real-time systems that are agile, scalable, flexible, and cost-effective.