By Andy Parsons, Chief Digital Advisor, Version 1
The financial services industry (FSI) is at a pivotal point between tradition and innovation, facing the challenging task of adapting to a swiftly changing digital landscape, all while maintaining and introducing new services for users.
As technology continues to evolve and advance, new applications, tools, and services are constantly emerging, with challenger brands entering the FSI as digital natives. The latest technology provides both traditional and newer financial institutions with increased efficiencies and improved ways to deliver services to customers. However, many established organisations continue to operate core business functions on legacy systems. The Financial Conduct Authority (FCA) found that 90% of financial firms still depend on legacy technology[1], leaving newer brands at a competitive edge.
This dependence on legacy technology hinders established institutions’ ability to meet modern demands for flexibility, speed, and integration with contemporary technologies. It also leads to high costs and significant resource consumption, which can stifle innovation and strain finances. Furthermore, legacy systems often fail to meet today’s stringent compliance and security standards, making them susceptible to both old and new threats.
To remain competitive in a crowded marketplace increasingly disrupted by the rise of fintech companies, digital transformation is crucial. Financial firms must meet the challenge of moving away from legacy technology head-on; identifying the key issues that are holding them back and developing a robust strategy to overcome them. In this article, we will identify the pain points of legacy technology in financial services, the roadblocks stopping organisations achieving digital transformation and what steps are required to make such change a reality.
An overdependence on legacy systems
Legacy systems, characterised by outdated technology stacks and monolithic architectures, continue to be a major pain point for traditional banks and other financial institutions. While some of these systems may have supported organisations reliably over the past few decades, they are not equipped to meet today’s demands for flexibility, scalability, and speed, as well as comprehensive integration with new technologies.
Additionally, the complexity and cost of maintaining legacy technology can come at a heavy price, with one study suggesting that it could cost banks more than $57 billion by 2028[2]. For instance, data centre systems, which have been relied upon for decades, remain functional by constantly adopting new hardware to create space for additional data and processing. This is a costly practice and the FCA discovered that three-quarters (78%) of financial services firms’ data is still stored on on-premise infrastructure[3].
This reliance on legacy storage solutions is just one example of how older technology is impacting financial organisations’ bottom line. What’s more, it is also stifling innovation. The longer resources are spent on these services and systems, the less money is available to invest in transformation. By comparison, switching to modern cloud systems offers flexibility as they can be scaled to increase, or decrease, the volume of data being processed in line with an institution’s needs, while also being more cost effective.
There are also serious considerations to be made around compliance and security. Most legacy systems will have been created before the introduction of certain regulations, including 2018’s General Data Protection Regulation (GDPR)[4]. While updates can be made to ensure legacy systems are equipped to deal with the stringent data handling and privacy standards, this is often very time consuming and adds another layer of processing. By comparison, the companies behind the newer, most advance cloud systems have taken these regulations into account when designing and building the technology to ensure their financial service customers are compliant. Similarly, outdated security protocols and data encryption practices can leave legacy systems exposed to a rapidly evolving threat landscape.
Transformation driven by holistic change
If legacy systems are the problem, then the solution, simply put, is to replace these with modern, cloud-based technologies. However, making this a reality is far easier said than done. The sheer size of core banking systems, combined with the depth of the integration of legacy systems, adds further challenges to the already complex process of digital transformation. It is an undertaking that requires collaboration between tech teams across an organisation, as changing the core solutions that have been replied upon for decades means every other system will need to be tested so they can be integrated properly. Moving on from certain legacy systems to embrace digital solutions could result in a complete overhaul in how certain processes are managed.
To enact transformation successfully, organisations need to start by clearly defining their business and technical requirements. These should be built around user needs and how upgrading systems will benefit customers and employees, rather than based on the technology itself. In addition, regulatory requirements must also be adhered to – from both a financial services standpoint, as well as putting the right processes in place to protect customer data.
With these goals and requirements in place, organisations can then break the transformation journey down into different stages. Though the temptation might be to change as much as possible at once, taking an iterative, modular approach will allow for more flexibility and composability along the way.
Risk management must also be another key focus throughout the transformation process. Not only should financial organisations be thinking about the current security and compliance requirements, but they should also think about how these might change in the future and whether the new systems will be able to adapt to meet new challenges.
Lack of digital transformation will leave the FSI behind
In order to remain competitive in an increasingly digital world, the FSI must embrace transformation. The transition from outdated legacy systems to modern, cloud-based solutions is more than just a technical upgrade; it’s a strategic necessity. As businesses become more financially conscious, adopting new technology becomes imperative. Financial firms that undertake this shift will gain enhanced operational flexibility, improved customer service, and robust security and compliance measures.
Although transformation is inherently a lengthy and complex process, adopting a phased and well-defined approach helps to justify the change. Financial institutions that identify where and how this change will benefit them can effectively manage risk, ensuring a smoother transition. This empowers them with the tools needed to innovate and grow, giving financial institutions confidence to overcome challenges and seize new opportunities.
