Despite its high costs and risks, legacy technology is still widespread in the financial services sector. In fact, a survey of bank executives by Dragonfly Financial Technologies found that more than 53% were concerned about their dependency on legacy technology and rising technology debt.
Now that mobile banking has become commonplace, the persistence of legacy infrastructure not only poses major risks to device security but also prevents banks from enhancing customer interactions and improving employee workflows.
Here are some current obstacles to legacy technology and banking modernization and how financial services companies can overcome them.
Banks are struggling with legacy technology
Traditional systems are expensive, labor-intensive and challenging to keep secure amidst the current IT talent shortage. According to the Capgemini World Retail Banking Report 2024, legacy systems create complexities with integrating new AI technologies, which are often incompatible with outdated processes. Banks that have not addressed their technical debt may miss out on valuable opportunities to use AI to streamline employee workflows and improve the customer experience.
As the Capgemini report points out, AI can streamline back-office operations by automating data entry, document processing and compliance checks. As a result, bank employees can devote their time and expertise to higher-value tasks that involve critical thinking and strategic decision-making.
Legacy systems can also hold banks back from delivering a modern customer experience. According to an IDC survey sponsored by Samsung, Bridging the Digital–Human Gap in Banking, 83% of customers expect seamless information across mobile, online and in-person interactions.1 Banks that still struggle with legacy systems may have difficulty enabling the kind of omnichannel integration required to effectively engage customers on all the channels they use today.
Strategies for modernizing legacy technology
Banks are grappling with their technical debt in a variety of ways. As consulting firm Endava explains in its 2024 Retail Banking Report, financial firms can pursue progressive modernization, total replacement or incremental change. Incremental change is the most popular approach. The majority of banks surveyed (47%) in the report followed that path. In this scenario, a bank makes small feature and functionality changes to an existing legacy system over time to gradually modernize it. For example, a bank might use this approach to update a customer-facing mobile app with a more modern interface, introducing small improvements like self-service capabilities without disrupting core systems.
The next most popular approach is progressive modernization (40%),which involves combining digital wrappers, open architecture and/or APIs to update legacy infrastructure, so it is cloud compatible. A bank could use this approach to quickly provide employees with advanced tools and dashboards that connect to legacy systems behind the scenes. This method has pros and cons, of course. Although it enables a modern user interface, the internal core is not updated, so the bank has deferred the task of fully modernizing it until a future date.
Some banks (13%) choose to replace a legacy core completely. Total replacement is the most complex, resource-intensive and potentially disruptive choice because it has a stronger impact on the bank’s overall systems and requires sophisticated change management. Financial firms that pursue this strategy tend to realize the benefits of modernization much faster than those that do not. Upon completing their replacement, they can immediately enable improvements that would be far harder to achieve in a legacy environment, such as real-time customer analytics and personalization.
Many banks recognize the potential in digital transformation when it comes to improving the customer experience and employee workflows; however, legacy technology is still blocking the path too often. There are multiple approaches to addressing this technical debt. The banks that take on the challenge of modernizing their legacy infrastructure now will be in the best position to manage risk and enable future growth.
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1IDC Infographic, sponsored by Samsung, Bridging the Digital–Human Gap in Banking, #US52023624, May 2024.
