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July 18, 2023

Revamping Legacy Banking Software: Step-by-Step Guide

July 18, 2023
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Modernizing legacy systems and updating information technology (IT) operating models are identified by PwC as key priorities for financial institutions to succeed in this increasingly digitized era. In this article, we’ll examine why it’s not just a passing fad, but a crucial step to modernize banks’ outdated systems. We will also discuss how to approach legacy banking app modernization, the benefits it offers, and the areas that should be prioritized in banking system revamping.

revamping legacy banking software

Benefits of Modernizing a Legacy Banking System

Upgrading a legacy platform can be a daunting task, but it is necessary for banks and neobanks to stay competitive. Although the high costs of transformation have held back many banking organizations, the benefits of legacy modernization outweigh them:

  • Achieving a new level of digital capabilities. Leveraging artificial intelligence, machine learning, data analytics, cloud computing, blockchain, and other technologies requires a platform designed specifically for them; they cannot be effectively utilized on an outdated platform.
  • Streamlined business processes. Integrating custom, leading-edge software into legacy systems can sometimes be very time-consuming and labor-intensive, or even impossible. For example, old systems may lack built-in data pipelines that can leverage the latest analytics tools. This substantial drawback slows down the development of new digital products.
  • Improved security. Legacy platforms are more vulnerable to data breaches and other malicious attacks. Upgrading allows you to meet today’s security standards and protect your business and customers from current and future risks.
  • Reduced regulatory pressure. Financial institutions with a presence in multiple markets must comply with a wide range of regulations. This necessitates robust digital solutions across the financial services enterprise. Developing APIs for legacy financial services software is not as simple as it is for newer technologies.
  • Optimized operating expenses. Although modernizing legacy software in the banking sector requires a considerable initial investment, the cost of maintaining the new software is often significantly lower than for a legacy system. In addition to licensing costs, legacy banking apps require an additional software layer to integrate with newer technologies. This layer must be built on top of a core system, which is a substantial investment. Even after its completion, it is not guaranteed to work efficiently.
  • Capitalizing on data. Upgraded banking software uses a far more efficient approach to data management, ensuring that no revenue is lost where it can be earned. This way, banks can offer customized products and services based on the analysis of customer data.

How to Approach Legacy System Modernization

If you’ve recognized that legacy systems are hindering your business initiatives and need to be updated, you may be wondering where to start. We recommend following this strategy step by step.

STEP 1: Assess  your legacy banking system

There are six key drivers (issues, concerns, or impediments caused by the legacy application). Three of these drivers are related to business processes, while the other three are related to IT.

  • Business drivers: business fit, business value, and agility. If your legacy application does not meet the new demands of digital businesses, it needs to be modernized.
  • IT drivers: cost, complexity, and risk. If the total cost of ownership is too high, the technology is too complex, or security, compliance, support, or scalability are being compromised, then it is time to upgrade.

STEP 2: Choose the appropriate modernization approach

There are four options available for updating legacy banking software. Let’s take a closer look at each of them.

Full software replacement

This approach entails entirely replacing the current legacy banking software with a modern solution. Although it may require more time and resources, it provides the benefit of starting anew with the most up-to-date technologies and industry standards. This allows the bank to develop a system that is tailored to its current needs, free from any constraints of outdated software.

Pros:

  • access to the latest technologies and frameworks
  • eliminated technical debt and legacy constraints
  • better alignment with current business processes and requirements

Cons:

  • high cost and resource requirements
  • potential data migration challenges

Incremental modernization

Incremental modernization refers to the process of gradually updating various components of legacy banking software. This approach helps to minimize the risk of complete system failure and allows the bank to maintain critical functionality while improving other aspects. It is a practical and effective method of modernizing software systems without disrupting the daily operations of the bank.

Pros:

  • reduced risks and easier management of change
  • flexibility to prioritize updates based on business needs
  • quicker introduction of new improvements without requiring the entire system to shut down

Cons:

  • possible challenges in ensuring that old and new modules work well together
  • it might take more time to have a completely modernized system
  • risk of accumulating further technical debt if not properly managed

Service-Oriented Architecture (SOA)

Adopting a service-oriented architecture entails dividing the existing software into smaller, independent services that can be updated or replaced individually. By doing so, each service can perform specific functions and communicate with others through APIs (Application Programming Interfaces).

Pros:

  • flexibility in updating individual services
  • better integration with third-party services and APIs
  • easier maintenance and improved scalability

Cons:

  • increased complexity in managing a distributed architecture
  • potential performance overhead due to inter-service communication
  • requires careful planning to avoid creating tightly coupled components

Cloud migration

Migrating legacy banking software to the cloud can bring about several advantages, such as better scalability, availability, and cost-efficiency. Cloud providers offer a range of services that can boost the software’s capabilities.

Pros:

  • scalability to handle variable workloads
  • better disaster recovery and data redundancy
  • reduced hardware and infrastructure maintenance costs

Cons:

  • potential compatibility issues with existing software and integrations

As you decide which legacy software modernization option to adopt, consider your organization’s specific needs, budget, and long-term goals.

You can also take a hybrid approach, combining elements from different strategies to create a customized solution that best fits your banking institution.

STEP 3: Opt for reliable technologies

To witness the positive impact of IT legacy modernization, ensure that your software development team is utilizing a reputable and best-in-class web or mobile technology stack that aligns with the unique features of your product and business goals. It is crucial to collaborate closely with your in-house engineering team or seek guidance from an experienced financial services consulting firm.

STEP 4: Outline a post-modernization strategy

Adopting software engineering best practices across your IT department can help you avoid the same problems that led you to redevelop your existing system. Clean and readable code, along with well-designed component architecture and comprehensive project documentation, will make your software easily testable, maintainable, and scalable in the long run.

Also, consider how your employees will adopt the new system. They may need some time and support to become accustomed to it, so be prepared to invest in workshops to expedite the process and enhance their performance.

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4 Priority Areas for Banking System Revamping

From the backend standpoint, legacy banking systems require revamping in four distinct areas.

DevOps/SecOps

This boils down to bridging the gap between development, operations, and quality assurance, aiming to reduce the time to market for new products without compromising their quality.

The key principles of DevOps that you should follow are:

  • Introducing more operations and quality assurance in the early stages of the software development lifecycle can help minimize the risk of costly rework later on.
  • Automating development and delivering pipelines systematically to prevent bottlenecks and accelerate workflows.
  • Closely monitoring core software metrics, including delivery lead time, deployment frequency, mean time to recovery, and change failure rate.
  • Collecting feedback, reviewing metrics, and continually investing in additional processes.

SecOps is the next step for banks that aim to meet security standards by promoting automation and platform design that integrates security as a shared responsibility throughout the entire IT lifecycle. By incorporating security testing early in the application development lifecycle, you can significantly minimize the risks of security incidents in deployed products (and avoid costly penalties!).

IT architecture optimization

Sometimes, it may not be feasible for most banks to fully step away from the legacy core because the risks are too high. In such cases, an alternative is to gradually decouple and modularize a banking IT architecture. A strong IT governance process is key to a successful evolution. This involves:

  • eliminating redundant and overlapping systems
  • creating a strong alignment between technical capabilities and your business objectives
  • developing a standardized technology portfolio that’s easier and much cheaper to maintain
  • implementing a unified approach to security management, risk, and compliance.

Data governance & management platform

Legacy systems often result in stranded or uncollected data, preventing banks from competing with digital players, deploying innovative analytics-driven solutions, or experimenting with predictive analytics, AI, and ML.

Banks cannot perform real-time business intelligence and advanced Big Data analytics with their legacy systems unless they have a strong data management platform in place.

Shifting to a unified data platform can improve data traceability, accountability, and reporting capabilities, and help banks comply with the latest industry regulations.

Data migration

The most important aspect of updating a legacy system is to ensure the protection of existing data through successful data migration.

Successful data migration includes:

  • extracting the existing data,
  • transforming the data to match the new formats,
  • cleansing the data to address any quality issues,
  • validating the data to ensure the migration goes as planned,
  • loading the data into the new system.

Add More to Your New Banking System

Adding new technology blocks to your banking app can open up new prospects for revenue growth. Take a look at the features that can help you stay competitive and profitable in this decade.

  • Decision analytics engines. They help to power up decision-making and provide personnel with the right insights at the right time. Use cases for AI-driven decision intelligence include alternative data analysis for investment decisions, intelligent client outreach based on recent behavior patterns, real-time access to automated insights about individual customers’ portfolios, improved pricing strategies, and data-driven product marketing.
  • ML-based credit scoring algorithm. Credit scoring models based on machine learning outperform traditional models that use both traditional and alternative data in predicting borrowers’ losses and defaults. These models are also more effective at predicting losses and defaults over time after a negative shock to the overall credit supply. Furthermore, their performance improves as new data becomes available.
  • Security and fraud detection tools. Thanks to Big Data and predictive modeling for identifying fraud, banks and financial organizations can significantly improve customers’ data security using voice recognition, TAN/PIN systems, strong passwords, and cellular networks.
  • Combination of AI and blockchain technologies. Together, these technologies increase security through inherent encryption, provide companies of all sizes access to the same pool of information as tech giants, and optimize energy consumption for data mining, leading to lower prices for mining hardware. Blockchain technology alone offers a secure and cost-effective method of sending payments, reducing the need for third-party verification and outpacing processing times for bank transfers.
  • Voice assistance. Some virtual assistants in banks are already voice-activated, providing a faster way to get answers to users’ account-related questions without typing. Furthermore, voice-activated virtual assistants in banking make it easy to transfer money or make payments quickly.

How to Choose a Banking Developer

Finding the right banking software development company can be a difficult and time-consuming task if you don’t know the key criteria to look for. Here are a few important factors you need to consider.

Previous experience

The primary measure of success for the company is the projects it has undertaken. To gauge the team’s expertise, check the company’s fintech project portfolio to see the types of products they have worked on. The more experience they have in a variety of projects, the better. Engineers can also generate new ideas based on what they have learned from previous projects. Additionally, you can ask for references from past clients and consider their feedback.

Technical proficiency

Your IT partner should have a strong team of specialists who are well-versed in all aspects of software development. This includes knowledge of the various programming languages and frameworks used in developing financial solutions. Additionally, your developer should be familiar with the latest trends in the financial industry.

Cybersecurity

Developing fintech software solutions comes with a major concern, as even a small mistake can significantly impact your business. To prevent security breaches and mitigate risks in the core architecture of your product, it is essential to work with a reliable fintech software development company. Make sure the company is well-versed in sensitive data protection best practices and adheres to relevant rules and standards such as PCI DSS (Payment Card Industry Data Security Standard) and OWASP (Open Web Application Security Project) during the development of your product.

Risk management

When selecting a development partner, make sure that the company will create an individual risk mitigation plan for your project. Your tech partner should be able to mitigate common risks in fintech software, such as:

  • malware attacks,
  • broken authentication,
  • cyber breaches,
  • server failure,
  • buffer overflow,
  • broken access control.

Moreover, your fintech outsourcing agency should offer product support services until your team gradually gains full control of the product.

Summary

By maintaining outdated legacy systems, you miss opportunities to invest in projects that could move your business forward. This creates opportunities for your competitors. To capitalize on growth opportunities and receive steady revenue from your bank, it is essential to upgrade your systems timely and in a professional way.

Since 2013, Itexus has been helping businesses maximize their technology investments. With a deep understanding of the financial services industry, strong technical expertise, and hands-on experience updating outdated banking software, we are a reliable partner. Contact us to discuss your needs and find out how we can help you.

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