The technological gap between traditional banks and innovative fintechs is measured in years. And it’s not just a handful of banking gurus who are aware of the issue—customers are starting to notice the tendency, too. According to the independent research conducted in the UK, 82% of surveyed decision-makers believe that high-street banks are falling behind on adopting digital innovations. Meanwhile, 20% even believe that traditional financial institutions will be completely replaced by their online counterparts by 2023.
20% of decision-makers even believe that traditional financial institutions will be completely replaced by their online counterparts by 2023.
Banking legacy software modernization is the way for banks to deal with the massive advance of fintechs into their territory. Relevant’s extensive expertise in fintech and the numerous success stories of our clients allow us to state it with such confidence. Upgrading the very core of a banking software platform can be a daunting task. But our dedicated software development teams have all the necessary technical and problem-solving skills to handle it.
Keep reading to find out why the legacy infrastructure in banking must be modernized and how to complete this process smoothly.
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Banks are notorious for their resistance to change. The main reason is hidden in the amount of pressure and regulations in the banking sector. Even though many are embracing modernization and are open to innovation, the overall pace remains painfully slow. The outdated core banking is one of the culprits to blame for that.
The definition of core banking encompasses the essential financial services such as payments, loans, mortgages, and accounts, as well as the backend technology that banks require to provide those services. These fundamental components directly affect the speed and reliability of every operation. When they are obsolete, meeting customer expectations becomes a challenge, let alone staying ahead of them.
After years of being supported and reworked by different IT service providers, core banking platforms often become cluttered, clunky behemoths, quite costly to own and maintain. The antiquated technology (like COBOL, a programming language born in 1959 and still used by 43% of US banks, as per the Financial Times report) is an evolutionary dead end, incompatible with current software solutions.
Fintechs, on the contrary, are agile, responsive to market changes, and able to efficiently modify and update their core systems. The advantage they gain over traditional banks in today’s world of finance is obvious. New products and trends are emerging all the time. To stay afloat, banks must rethink the way they serve customers and get on the road of digital transformation and innovation.
It’s not a fashion show, so being trendy isn’t the end goal for banks. Let’s talk about the more tangible, down-to-earth reasons for modernizing legacy systems in banking. Here are the advantages banks get when they go for the upgrade:
Ultimately, a complete redesign of legacy infrastructure in banking leads to monetary gains while also making financial institutions significantly more relevant and future-proof. It doesn’t happen overnight, but it always pays off.
Most processes of banking legacy system modernization boil down to transitioning from a hefty mainframe application to a modular cloud-based solution. There are two types of core banking platforms available on the market today:
On a side note: the above descriptions may sound a bit complicated. Upgrading legacy systems is a serious undertaking that requires technical expertise, especially when it comes to the finance industry. If you’re about to commence a modernization project in your financial institution, we recommend outsourcing fintech software development services to a qualified partner. Programmers with industry knowledge in banking will explain your options and help you choose the best strategy.
Even though there are differences in ways of strategy implementation, the logic that governs the process is similar. In general, you’ll have to take three steps. Let’s look at each of them in more detail.
As the name suggests, during this step of banking legacy software modernization you’ll need to define the areas where your existing system is holding you back under current market conditions. A bird’s-eye view will work best, and answering the following questions will help structure your findings:
We can’t give you an exact score you’ll have to get on this test to be concerned, but you will need to interpret the diagnosis carefully. The best practice is to involve those executives and decision-makers from your company who are well-acquainted with its core services and business objectives.
Depending on the “patient’s condition”, you can follow different approaches to banking legacy system modernization. To choose the one that will suit your financial institution best, you’ll need to take into account the severity of issues you’ve identified, as well as the cost and complexity of modernization.
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Here are some common scenarios: :
No matter what approach you’ll follow, inviting a software vendor with experience in financial app development to join the discussion is crucial at this stage.
As you can see, choosing the most efficient approach to legacy application modernization in the banking industry requires careful consideration.
The closest analogy we can think of is that of deciding between ordering a custom-built Tesla Cybertruck and fixing your old trusty pickup. A simple paint job and a couple of minor repairs here and there might keep it running for another 3-5 years, taking you from point A to point B with a few occasional breakdowns. Conversely, a brand new automobile with custom options will need a much larger investment while offering seemingly superficial improvements.
In the first scenario, after three or five years of slow and cautious driving, you will likely end up with a rusting jalopy. You could never trust the car enough to cross the state border, and its whims cost you many lost opportunities.
In the second case, you’ll have a future-proof modular vehicle that runs on sustainable energy, saves your hard-earned cash, and can take you to places you’ve never even dreamed of.
Of course, this analogy shows things in a simplified form. However, just like electric vehicles are the next link in the automotive evolution, agile cloud-based core banking solutions are certain to take over the market from legacy systems.
But let’s go back to the actual implementation process and talk about how to make it as smooth as possible.
Once you get a general understanding of your strategy for legacy banking system replacement, you can initiate the implementation process. Below is a list of recommended practices.
Technical debt accumulates for numerous reasons, for example, developers taking shortcuts to meet deadlines or budgets. It’s a common occurrence on long-term projects handled by different contractors, which is often the case with legacy banking software. To get an accurate assessment, you’ll need to factor in the prospective cost of adding or altering features and functionality later.
It’s important for all decision-makers to cooperate closely with the IT service provider. Delegating does work miracles, but in this instance, each party needs to apply their expertise, share ideas, and take responsibility for the outcome. Remember: technology is a tool for reaching your business heights, and they should always come first.
Focusing on the pain points that you need to address and the strategic business advantages you plan to achieve is crucial. Always consider the context and set measurable goals, assess risks, and define tolerance. Discuss those parameters with your IT partner and make sure you share a common vision prior to making irreversible changes.
Direct your efforts towards creating maximum value for your business and customers. Prioritize it over the technical side of things, and aim for immediate tangible benefits. This will help justify the investment. In the same vein, concentrate on the total cost of ownership instead of the purchase price. Look at the big picture.
Over the years, your financial institution has surely accrued lots of valuable data and intellectual property. Those digital assets must survive the transition intact. Pay close attention to the process and reiterate the importance of preserving them to your software partner.
Go for the most cutting-edge tech stack and architecture to ensure your new platform’s maximum relevance and compatibility for years to come. Consult with your IT partner concerning the best options.
Allow time for employee training, and be prepared that there will be a learning curve. Discuss and plan onboarding with the software development company, clarify schedules for updates and maintenance details. Even the most robust and well-tested solutions have a tendency to fail, so you need to get ready for incidents in advance.
The time to mull over the prospect of banking legacy software modernization has passed. Banks and other financial institutions must weather the storm and adapt to the new reality dictated by the rapid evolution of fintechs. The gravity of such decisions is immense, but they will attract customers and unlock new revenue streams.
However, this can’t and shouldn’t be a solitary journey. Finding a trusted software provider is the natural first step.
Our team at Relevant is willing to keep you good company and build a solution that will match your needs. By outsourcing to Ukraine, you’ll get favorable rates and a product of the highest quality. So get in touch, and we’ll discuss your modernization project!
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