Competing in the new digital age of banking, premier institutions are confronting the issues of legacy systems, not only to extend existing systems’ shelf life but rather to adapt their IT and business environments for the future. The new era of banking, which centers on the consumer and their lifestyle, is driven by data and is supported by open and flexible technologies. With no historical restrictions, new digital banks can perform tasks that traditional banks need thousands of staff to complete, saving them a significant amount of money. Modernization is now crucial for reducing legacy IT’s “digital resistance.”
For instance, a high percentage of a bank’s annual revenue comes from payments. As a result, new companies are entering the market with novel solutions as customer expectations for cheaper or accessible payments drive down unit pricing. It is happening as banks’ revenue growth from payments continues to stagnate across the globe. Banks must, therefore, take advantage of the chance to upgrade banking IT solutions to implement low-cost, agile, scalable operations that support other revenue-generating products and services.
Failure to adopt that seriously threatens the profitability of payments processing and ongoing expenditure, which is required to meet new infrastructure initiatives like faster payments.
What is a legacy system?
When we use the term “legacy systems,” we typically refer to older existing systems or historically developed system landscapes in businesses. That sounds a bit archaic, and frequently it is: the previous technology no longer satisfies the current standards. However, these well-established systems provide excellent value because of their extensive functionality and vast inventory data. After significant work, their additional value contribution can apply to contemporary operating contexts.
In legacy systems, ongoing additions of new features, stand-alone solutions, and interfaces to other systems may result in a tangle of dependencies over time that lacks any discernible structure or logic. It makes things more complicated and creates a complex system landscape that looks like a plate of spaghetti. It is, therefore, appropriate that a simple migration to new versions or other suppliers will be a lasting solution.
The transition of banking to digital technology.
After the coronavirus outbreak, it has become clear that banking institutions need to speed up their digital transitions. The banking sector needs to modify its business models for front-facing and back-office operations to keep up with the changes and avoid potential upheavals. True digital banking and complete transformation are based on implementing the most recent technology, such as blockchain, cloud computing, and IoT.
It centrally places the consumer in every transformation strategy. Financial organizations, therefore, need to optimize their big data to automate business processes and cut expenses in light of low-interest rates, substantially declining banking fees and rising customer demand. Banks can quickly develop omnichannel products, services, and capabilities by updating their applications using artificial intelligence, cloud technology, and automation. It will further enhance the user experience and increase trust and loyalty.
How are banks overcoming their legacy systems?
Banks can choose how quickly and modernize their core banking systems by moving the crucial parts of those systems to a higher-level platform, such as intelligence and business logic. The platform adds solution modules that gradually replace the out-of-date core banking systems’ features, but the core stays unmodified. A similar banking platform is a foundation for integrating contemporary technology, sitting like a dynamic layer atop the current systems.
The software architecture can be modular by creating a microservices architecture based on the self-contained systems (SCS) philosophy. As a result, particular regions can be developed or changed without affecting other systems. The individual SCS communicates with external channels and one another via APIs. Industry models like BIAN or IBM Information FrameWork (IFW) serve as a reference to accomplish a quick deployment.
Thus, the complexity of the legacy system can diminish while the business can gradually outsource the core banking systems. Functionality gradually moves into the new agile environment until the core system is devoid of logic and joins. The basic banking system becomes replaceable, and the banking platform serves as the main interface.
From a study by consulting firm PwC, financial institutions can draw the following conclusions and take the following steps:
- Reducing Complexity. The foundation for a seamless legacy replacement is prepared by extracting business logic from the central banking systems. Only after this simplicity will banks be able to start essential digitization projects.
- API-based standardization: Projects like the Banking Industry Architecture Network (BIAN) aid in defining software architecture standards, ensure the proper encapsulation of banking systems and improve interoperability.
- Modularization of the software architecture: Small-scale business architecture with a modular design makes up most of contemporary banking IT systems. Its implementation uses container technologies, microservices, and APIs. Banks can respond to market demands more quickly as a result.
Changing competition, regulations, and higher client expectations are a few difficulties banks face. New technologies are also emerging simultaneously to meet these needs precisely. Modernizing basic financial systems is the foundation for incorporating cutting-edge technologies into IT systems. Therefore, banks require a long-term plan to update outdated systems.