What Is Legacy Modernization in Banking?
Banks are under a lot of pressure these days. We’re not talking about the normal business pressures that financial institutions are accustomed to, either. Those typical stakeholder pressures to reduce operating and IT costs and increase profit margins, all while battling consistently low interest rates—that’s just a part of the business. There is a different breed of financial industry pressures that have evolved over the last decade, contributing to an entirely new set of anxieties for financial services leaders. Among a potential impending industry-wide shift to consumer-directed finance, rising consumer expectations of digital financial services, growing concerns around the ownership of consumer data and data rights, and the emergence of innovative fintech companies, legacy modernization might just be one of the biggest concerns for some of Canada’s leading banks.
While largely focused on reevaluating and redefining the role of the core banking system, legacy modernization is the ongoing process of updating the underlying systems, applications, and IT infrastructure of a financial institution in order to improve business processes and build a flexible and modern banking platform that can deliver next-generation digital banking experiences for consumers.
One of the biggest challenges with legacy modernization is that most legacy core banking systems are designed on outdated monolithic architectures, which makes changing those current systems extremely challenging, time-consuming, and risky. Contributing to the problem, those legacy core banking systems are generally based on outdated programming languages and are often inflated with complex code bases containing decades of undocumented customizations, making them even more difficult to update or replace. To make matters worse, many banks have discovered that it’s getting harder and harder to find engineers and programmers with the required skills to maintain those systems.
Although they continue to provide reliable transaction processing functionality, legacy core banking systems have reached maturity, and investments in technology are required to ensure financial institutions are prepared to respond to the recent convergence of industry pressures.
A detailed, strategic approach to legacy modernization will help banks and financial institutions address current technological constraints, redefine the role of core systems, and outline an approach for core modernization that leverages application programming interfaces (APIs) and cloud-based technologies.
Any investment in core technology and legacy modernization should aim to promote interoperability and innovation, while contributing to an institution’s ongoing digital transformation and long-term business objectives.
Legacy Modernization Approaches: Replacing, Refactoring, Replatforming, Rehosting, and Rebuilding
There are many approaches to legacy modernization, and financial institutions considering core modernization as a part of their digital transformation strategy will quickly discover that there’s no clear solution to this problem. Every financial institution is different. Each one will have its own unique set of systems, customizations, integrations, business processes, security and compliance requirements, budgets, and resources.
Although the specifics of a core modernization initiative will diverge on tactical approaches aimed at optimizing business value and achieving long-term business objectives, every institution will choose from a few common approaches to legacy modernization.
A key consideration when creating a cloud migration plan, a legacy modernization approach to core systems can include replacing, refactoring, replatforming, rehosting, and rebuilding.
Legacy Modernization: Replacing Legacy Systems
Replacing a legacy core banking system is no small task. With this legacy modernization approach, a bank or financial institution completely decommissions its core banking system and replaces it with a modern platform built from scratch and designed to take advantage of cloud services, APIs, microservices, and modern digital technologies. These platforms are typically referred to as cloud-native platforms. In addition to providing a foundation for efficient DevOps and continuous delivery models that enable rapid deployment and support innovation, cloud-native platforms are specifically designed to leverage the flexibility, adaptability, scalability, and performance benefits of the cloud.
In most legacy modernization strategies, the cloud will be considered the foundation for legacy modernization and digital transformation—an environment on which financial institutions will build their modernized solution.
While a complete core replacement may sound enticing to some financial services leaders hoping for an efficient rip-and-replace solution, replacing a core banking system is generally considered the most disruptive and risky approaches to legacy modernization. The core banking system is a central component of a financial institution’s banking architecture and introducing massive changes to the core system can introduce widespread, disruptive impacts throughout a bank’s operations.
Requiring a considerable number of resources, core banking replacements are also lengthy, complex projects that often require multi-year efforts and are notorious for running over budget if not properly managed. Core banking replacements were once considered the only option for legacy modernization in banking, but new technologies as well as advancements in application management processes have provided banks with less disruptive options that allow for phased, targeted, and containerized approaches to modernization.
Legacy Modernization: Refactoring Legacy Systems
This brings us to refactoring. With a refactoring approach to legacy modernization, a financial institution focuses on porting its pre-existing monolithic core banking system code and applications to the cloud. This allows banks and financial institutions to leverage powerful pre-existing core functionality while also moving to cloud-native, container-based, microservices applications.
Refactoring core applications provides an opportunity for banks to move to the cloud, leverage modern technologies and APIs, make critical improvements to the development and deployment process, and prepare for open banking and consumer-directed finance.
A refactoring approach is significantly less disruptive than a full core replacement. It offers an approach to modernization that lets the trusted core system continue to do what the core system does best, while also allowing the financial institution to modernize, adopting cloud services and modern technologies that promote innovation and interoperability.
Legacy Modernization: Replatforming & Rehosting Legacy Systems
Intended to leverage investments in core systems, replatforming and rehosting are the least intrusive approaches to legacy modernization where a bank or financial institution simply migrates its core applications to a cloud-based environment. These approaches typically require minimal changes without altering any core functionality and are generally focused on containerizing applications and ensuring they will simply run as expected in the new environment.
As a core modernization approach, replatforming and rehosting allow financial institutions to simply shift legacy systems onto the cloud where they can begin to explore cloud services, modern integration strategies, and new approaches to product development.
Legacy Modernization: Rebuilding Legacy Systems
Rebuilding a legacy system is just as complex and onerous as it sounds. Focused on rewriting and recreating the functionality of the core system—along with what is often decades of code customizations—this legacy modernization approach is focused on starting over and recoding the core system from scratch, leveraging an API-based design approach and modern cloud-native technologies.
Financial institutions interested in taking a rebuilding approach to legacy modernization will begin a journey of assessing, identifying, and re-coding core functionality, essentially rebuilding and rearchitecting the legacy application as microservices that are cloud-native and designed specifically to run on a cloud environment.
Legacy Modernization Is an Opportunity to Modernize the Core, Leverage Cloud Technologies, and Own the Customer Experience
The financial services industry is changing. It’s not just changing incrementally, either. With financial institutions focused on the adoption of cloud technology and growing support for the data-driven experiences of consumer-directed finance, the industry is ultimately facing a fundamental paradigmatic shift in the way financial services are delivered to consumers. That shift is primarily driven by new and evolving pressures that have ultimately converged and have reached—or will predictably soon reach—a kind of tipping point.
Influenced largely by the role of technology in financial services today—including technological advancements in cloud-based services, the emergence of new banking platforms and technologies, and the ever-growing consumer expectations for what data-driven technology can do to improve the banking experience—this new breed of pressures is forcing real change and is finally gaining the attention it deserves from industry leaders.
Whether replacing, refactoring, replatforming, rehosting, or rebuilding core systems and applications, a legacy modernization strategy is an opportunity for banks to adopt modern, cloud-based technologies and efficiencies in order to focus on innovative new ways to own the customer experience.
Financial institutions will need to balance risk and cost when considering how they will strategically approach their core modernization initiatives. No matter what approach they take, they will need to proceed with careful consideration in order to minimize disruption to regular business operations and ensure that their modernization strategies are aligned with the longer-term business objectives of the financial institution.
Legacy systems shouldn’t feel like a liability. With a detailed legacy modernization strategy, a financial institution’s technology should be one of its biggest assets.
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