You do not have to look far to find information on how legacy systems are letting banks down. Research by Fraedom found that almost half (46%) of bankers perceive legacy systems to be the biggest barriers to the growth of commercial banks.
Why Are Legacy Systems Barriers To Growth?
One reason for this struggle is the fact that it is becoming more and more difficult to find people with the coding skills to provide support, maintenance and fixes to these outdated systems. Big banking systems created within the 70s and 80s were written primarily in COBOL, which was introduced in the 60s. There are very few people still learning COBOL in today’s day and age, and most people who still have these skills are well into their fifties. As this skills pool continues to shrink, the maintenance of legacy systems will dwindle further into non-existence. Unfortunately, legacy systems were not designed for the digital age of today.
Legacy systems are also holding banks back in this age of instant gratification, where many customers want to open accounts instantly. Many banks rely on paper processes and siloed data to open bank accounts.
Traditional banks also risk losing customers due to IT systems going down and leaving customers unable to access services. Their complex legacy systems leave them with more down time than helping them progress.
Many traditional banks have realised that they need to make a change and move away from their decades-old systems, but it is a very risky process. At big banks, thousands of systems are interlinked multiple times as part of different banking products.
Why Did This Happen?
In the 70s and 80s, banks were masters of technological advances. ATMs, BACS, and international card payments were brought into existence during this time. Innovation was the norm of the day. These systems were definitely built to last, but, unfortunately, they weren’t necessarily built to change.
Banks were in many cases not quick enough to embrace the next wave of innovation. Instead of seizing the chance in the early days of the internet, banks invested heavily in client-side software and CD-ROMs. When banks started realising this was not going to work out, they should have taken the opportunity to replace their monolithic legacy system designs. They should have looked at developing simpler and agile alternatives, but most pursued a different strategy – trying to enhance their existing inflexible systems.
It is true that replacement projects are expensive and time-consuming. These big projects do frequently fail, and this can be damaging to brand reputations, IT department credibility, and customer and shareholder confidence. This can lead to decision makers rather deciding to stick to the tried-and-tested processes which looks much more appealing a.k.a. their legacy systems.
Financial services firms thus need to find a way to speed up their adoption of new digital platforms, and on the other hand, they also need to transform how they connect to the legacy systems that underpin much of their business if they’re to integrate seamlessly with these new digital platforms. So how can banks find a balance between the two?
If unable to let go and abandon legacy systems, banks must find a way to refresh and extend them so that newer digital platforms and technologies can plug into the immense value they possess. Innovation unfortunately does not happen with legacy systems themselves, but they can fuel the fire for new approaches and data.
Eventually, banks will have to invest the time, money and resources necessary to modernise their IT infrastructure if they are to compete in the digital economy. Many banks are working through the problem by forming collaborative partnerships with fintech companies. This has truly become a mandatory strategy for long-term sustainability.
What’s The Solution?
The good news is, with the boom in technology, there has never been a better time for banks to be assisted in this transformation. Banks can overcome many legacy systems issues by partnering with fintechs and adopting cloud services. The majority of banks do lack in-house knowledge and expertise to deal with these issues, thus forming partnerships with fintechs and cloud service providers will enable them to access the services, knowledge and experience needed to implement or update their product offerings.
The great thing about partnering with the fintechs is the fact that this will not only cater for current requirements, but also future developments. Unlike an internal IT team, fintechs will have roadmaps which consider new regulations and future customer needs. They will also take into consideration services which will only lead to accelerating a bank’s transformation, such as machine learning, cognitive and robotic process automation, IoT, big data and advanced analytics. Fintechs and cloud service providers are well-placed to help banks understand the entire process of digital transformation, including how to prepare their people, processes and data before they even consider implementing new technology.