About the author
Anita Petanović
Project Manager
With today’s rapid pace of technological development, banks – probably more than any other industry – face significant pressure to keep up with innovations through application modernization. And this isn’t just keep up with innovations. Banks need to stay compliant with the strict regulatory requirements governing the industry, such as with DORA in the EU.
The rise of fintech operators has intensified competition, with these agile newcomers capturing a substantial share of the market by offering seamless digital experiences. However, traditional banks often rely on legacy systems, which can be inflexible and resistant to change due to their complexity and high maintenance costs.
Most banks recognize the need to modernize their systems to remain competitive. They are actively adopting modern technologies to stay ahead of the curve.
However, the rapid pace of technological change means that even the most advanced solutions can quickly become outdated. This cycle necessitates continuous modernization to ensure that business systems remain relevant and effective.
What is application modernization?
Application modernization in the banking sector involves updating legacy systems to align with modern technologies, evolving business needs, and changing customer expectations. This process aims to enhance scalability, agility, and performance while minimizing technical debt and optimizing operational costs.
Why is application modernization important for banks?
1. High maintenance costs
Banks spend a significant portion of their IT budget on maintaining legacy systems. In the US alone, of the nearly $2 trillion spent on IT products, staff, and services in 2022, nearly $1.14 trillion was spent on maintaining legacy systems.
2. Operational risks
Legacy systems pose operational risks due to their complexity and inability to handle high volumes of transactions without downtime. Prolonged system downtimes have attracted regulatory scrutiny, damaged customer trust, and resulted in substantial financial losses to the tune of $400 billion annually.
3. Security vulnerabilities
Legacy systems are more vulnerable to cyber threats due to outdated security measures. This vulnerability puts sensitive customer information at higher risk, potentially leading to financial and reputational damage for the bank. According to IBM, the cost of an individual data breach in the financial sector is just a touch above $6 million.
4. Barriers to transformation
According to an independent survey, more than 55% of banks view their core banking system as the biggest obstacle to achieving their digital goals. This includes challenges in scaling operations due to data silos and production bottlenecks.
5. End-of-life systems
In 2023, 60% of surveyed banking leaders told Forbes that legacy systems are holding them back. And with these systems becoming end-of-life, meaning they are no longer supported, they introduce significant risks and necessitates urgent modernization.
6. Compliance risks
Legacy systems often use outdated infrastructures, leading to compliance and security risks. This can result in penalties and fines, further impeding innovation and growth. In fact, last year, 75% of banks in the UK were at risk of noncompliance owing to the state of their legacy systems – and this is one of the most advanced financial services markets. And we can’t forget DORA, either, adding more pressure on banks and financial service operators doing business on the continent.
These threats to banking service providers highlight the importance of modernizing legacy systems. Next, let’s take a look at the benefits of modernizing your legacy applications.
Key benefits of application modernization in banking
Risk avoidance isn’t the only reason to update your systems. Here are several key benefits that enhance your banking services to give you a competitive edge.
1. Enhanced performance and efficiency
Modernizing legacy applications leads to faster transaction processing and minimized downtime, ensuring seamless customer experiences.
Optimized speed and reliability improve operational efficiency and productivity, allowing you to handle increased digital transactions more efficiently. Additionally, streamlined processes reduce manual intervention, leading to cost savings and improved customer service.
A good example of this was when Strabag managed to cut reporting time from days down to literal minutes when we helped consolidate their ERPs into a single optimized system.
2. Cost savings
Lower maintenance costs compared to legacy systems reduce operational expenses for banks. This leads to more efficient use of resources and a reduced need for specialized legacy system expertise – which drives costs down even further. Consolidating applications and eliminating redundant systems will help you dramatically lower costs.
3. Improved security and compliance
Updating security measures, including advanced encryption and multi-factor authentication, will help safeguard customer data from cyber threats. Enhanced compliance with evolving regulatory requirements, such as DORA, GDPR, and financial industry-specific regulations, mitigates risks and avoids costly fines.
Real-time threat monitoring and proactive cybersecurity ensure continuous protection against emerging threats.
4. Scalability and flexibility
Seamless cloud scalability allows you to quickly adapt to shifting demands and market changes. Flexible architecture facilitates quick and easy updates, as well as integrations with new technologies. This helps you grow more agile, accelerating your response to technological innovations. Additionally, this scalability supports the quick introduction of new services and products while avoiding costly service disruptions.
5. Enhanced user experience
Modernizing banking applications provides better UI/UX for both your customers and employees, boosting overall satisfaction and engagement.
Improved customer service capabilities, such as personalized financial advice and real-time account updates, help to nurture customer loyalty.
In addition, an enhanced user experience across all channels – whether digital or even in person – meets evolving customer expectations.
For example, Raiffeissen Bank responded to changing customer demands by rewriting their entire online banking platform.
6. Integration with emerging technologies
The modernization process enables easier adoption of new technologies like AI, machine learning, and cloud computing, allowing banks to innovate and stay competitive.
Improved compatibility with modern systems and hardware facilitates smoother integration with fintech solutions and open banking APIs. Integration with leading platforms supports the development of cutting-edge banking services and products.
Best practices for modernizing legacy apps in banking
Step 1: Conduct thorough assessment and discovery
When starting the modernization process, it’s crucial to conduct a comprehensive assessment of the current state of your legacy applications, including their functionality, performance, and user base.
This initial step involves beginning with discovery and analysis to identify key challenges, opportunities, and user needs that will inform modernization strategies. Additionally, it’s important to inventory existing applications and their interdependencies to understand how different applications interact and depend on each other.
Notch’s Director of Service Delivery, Martina Margitić said about this first step:
“In my experience, when we embark on an application modernization project, it is crucial to ensure a seamless transition for the end users. Every functionality which worked well in the legacy system should continue working without interruption. Features users liked must be preserved, and it is recommended to improve those which lacked good user experience. Transitioning to a new system is inherently stressful, and as a Business Analyst, I consider it essential to prepare the organization for change through a detailed, discovery-driven analysis.”
Step 2: Define objectives and strategy
Defining the reasons for modernization is essential; this involves determining the ‘why’ behind the effort – this can be in response to any of the risks, or reap any of the key benefits, or all of the above.
Next, determine the modernization strategy by choosing from various approaches like re-architecture, re-platforming, or replacement. Exploring different modernization approaches, such as microservices architecture or cloud migration, helps in selecting the best fit for the organization.
Finally, define a crystal clear project timeline to establish milestones and deadlines for the modernization process.
Step 3: Secure stakeholder buy-in and resources
Ensuring stakeholder buy-in is crucial. This step involves engaging with stakeholders to align expectations and secure support for the modernization effort. It’s also important to seek consensus on objectives, goals, and resources to ensure all parties agree on what needs to be achieved and how.
Prioritizing team skill set and competency is vital to ensure the team has the necessary skills to execute the modernization plan effectively.
Step 4: Plan for data and security
To manage data effectively, it’s necessary to discover, classify, and map the flow of data to understand how data moves through the system and ensure seamless migration.
Having a data migration checklist in place helps plan for data transfer to minimize disruptions. Embedding security at each stage of the process is crucial to protect sensitive banking data, and securing APIs ensures they are safe from unauthorized access.
Additionally, incorporating privacy by design builds privacy considerations into the modernization process.
Step 5: Focus on user experience and future-proofing
Conducting UX analyses is important to improve user interfaces and enhance customer and employee experiences. Taking a close look at the user base helps understand current and future user needs.
Considering both current and future value ensures modernized applications meet current needs while being adaptable for future changes.
“Great banking experiences start with great UX design that users trust. By focusing on user needs, we’re creating an experience that will make their lives easier, and banking doesn’t really have to feel like banking. Modernizing isn’t just about the latest technology but also about user experience – creating intuitive and seamless journeys makes users stick around,” says Aida Malkić, Notch’s UX/UI design lead.
Thinking about future-proofing involves designing systems that can easily integrate with emerging technologies. Developing a detailed onboarding program ensures users are well-prepared for the transition.
Step 6: Execute and monitor progress
Setting measurable goals for modernization initiatives is essential to track progress through clear KPIs. Tracking KPIs to identify discrepancies allows for prompt action to address any issues.
Boosting operational capabilities with automation enhances efficiency by automating processes where possible.
Orchestrate full-stack visibility to ensure visibility across all layers of the application stack to manage and optimize performance.
Step 7: Implement and refine
Migrating applications to a microservices architecture is beneficial as it adopts a microservices approach for greater flexibility and scalability. Creating a portable environment ensures applications can be easily deployed across different environments.
Overcoming user concerns and resentments as quickly as possible involves addressing any user resistance promptly to ensure a smooth transition.
This step also involves refining processes based on feedback and performance data to continuously improve the modernized applications.
Conclusion
Legacy app modernization is critical for the financial sector. Banks are millstoned by bulky, costly, inefficient systems that are keeping them from adopting the technology needed to compete with agile fintech operators. Further, customer data is at risk, and fines are looming for any bank that doesn’t meet modern compliance standards. Malicious actors preying on valuable personal data are also circling, enticed by the prospect of hitting paydirt by exploiting the vulnerabilities inherent in outdated systems.
By taking the steps above, you’re limiting your risk exposure to breaches, while also becoming more competitive on the financial services market. Modernizing legacy applications will help banks nurture customer loyalty, while also improving user experiences for their employees.
