Is the Legacy Challenge Becoming a Growing Burden?

The period of “transformation” in banking is over. We are now in an era of “agility and flexibility,” driven by relentless technological advancements, fierce competition and the demands of digital-savvy customers. Traditional banks find themselves at a juncture, balancing the proven reliability of their legacy systems with the need for agility. Indecision is not an option — hesitation will only hinder any bank’s ability to compete effectively.

Fintech disruptors, the expansion of big tech into financial services and the increasing demand for embedded finance solutions are reshaping the industry. For traditional banks, modernization is not a choice but a necessity.

The "At Scale" Trap: A Crumbling Foundation

Legacy technology, the long-standing backbone of banking operations, is becoming a burden. Outdated systems are ill-equipped for the demands of the digital age that encompass real-time transactions, data analytics and seamless integration with modern SaaS solutions. Clinging to these systems has significant consequences: operational costs are 20-30% higher due to maintenance, there is a 50% slower time to market for new products (McKinsey, 2023) and higher risk of security vulnerabilities compared to banks that have modernized their systems (McKinsey, 2023).

Adding to the complexity is the dwindling pool of legacy IT talent. As seasoned professionals retire, banks struggle to find experts capable of maintaining antiquated systems. Escalating costs of supporting legacy technology strain already tight IT budgets, limiting investment in growth and flexibility (Deloitte, 2020).

Progressive Modernization: The Strategic Choice

Faced with these challenges, banks are increasingly adopting a strategy of progressive modernization: an approach to updating an organization's existing technology infrastructure incrementally, rather than through a complete overhaul. This allows institutions to build on the strengths of their existing core systems while integrating flexibility through modern platforms that work seamlessly with legacy infrastructure. The benefits are substantial:

• Accelerated Time to Market: By decoupling product development from legacy systems, banks can launch new products faster, adapting to market changes and customer needs in real-time. For example, a modern processor platform can reduce the time from concept to launch to as little as 2-3 months (McKinsey, 2021).
• Elevated Customer Experience: Delivering seamless, personalized experiences across all channels helps foster loyalty. Customer Experience (CX) leaders generate 72% more total shareholder return than their counterparts (McKinsey, 2023).
• Cost Efficiency: Modernizing reduces the "keep-the-lights-on" expenses that consume significant portions of IT budgets, allowing banks to allocate more resources to innovation. For instance, fintech banks using next-gen platforms operate at 10% of the cost of traditional banks (McKinsey, 2022).
• New Revenue Streams: The ability to rapidly launch new products enables banks to tap into new markets, such as embedded finance, a market projected to reach €100 billion in Europe by 2030 (McKinsey, 2022).
• Improved Security: Modern platforms offer robust security and compliance features to safeguard sensitive data against sophisticated threats.

Empowering Agility and Flexibility

Progressive modernization empowers banks to address the limitations of legacy technology while fostering a culture of continuous improvement and rapid iteration. Currently, developers at traditional banks spend only 32% of their time on coding, with most time consumed by maintenance and integration tasks (McKinsey, 2022). By adopting a modern platform, banks can shift focus toward innovation, accelerating their time to market. By decoupling product development from outdated systems, banks can foster a culture of iteration and test-and-learn, which accelerates time to market.

If progressive modernisation is the “what”, and agility and flexibility is the “why”, then optionality is the “how.” Banks should avoid one-size-fits-all solutions and embrace a "best-of-breed" approach, choosing providers that excel in specific areas, such as card issuer processing. This ensures maximum flexibility and agility, enabling banks to stay ahead in an evolving market.

Embedded Finance: The New Frontier

The rise of embedded finance, where non-financial companies integrate financial services directly into their offerings, represents a significant shift that banks cannot afford to ignore. By 2030, up to 15% of bank revenues and 25% of retail and SME lending revenues may be derived from embedded finance (McKinsey, 2024).

Banks can seize this opportunity by leveraging modern card issuer processing platforms, like Episode Six's Tritium platform, to power the embedded finance revolution. Solutions like Cards-as-a-Service, Wallets-as-a-Service, and Ledger-as-a-Service enable businesses to integrate payment and financial capabilities seamlessly, tapping into a market poised for explosive growth.

UX: The Differentiator in the Digital Age

So often is the case that bank product teams start-off with customer-centric designs but end-up building legacy-centric experiences. Rapid iteration empowered by continuous experimentation – essential for modern DesignOps – is not possible. Without the configurability, functionality, and modularity of modern cloud-native platforms, banks will always be one step behind FinTechs.

In today's hyper-competitive landscape, user experience (UX) is the ultimate battleground for banks. It's essential for customer acquisition and retention. Global banks are losing one in five of their customers due to poor customer experience (Fintech Magazine, 2023).

Modern card issuer processing platforms enable banks to deliver exceptional UX through features such as real-time transaction processing, personalized rewards, and omnichannel integration. Ignoring the importance of UX is a mistake as customers increasingly gravitate towards providers that offer easy to use, intuitive experiences. The seamless fusion of cutting-edge technology with intuitive design is the key to offering exceptional UX.

Take the Leap: Embrace the Future of Banking

The future of banking belongs to those willing to challenge the status quo and embrace cutting-edge technology. Don’t let legacy systems hold you back.