Wednesday, Jul 6, 2022
International Finance
Banking and Finance Magazine

Legacy systems in banks explained

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Use of legacy systems can present complex situations for banks in the modern world

The disparity between the legacy systems used by traditional banks and the new systems used by challenger banks is stark. Many banking legacy systems have been running for more than 30 years with an estimated over £2 trillion passing through legacy banks every day. With so much money relying on these systems it is understandably risky and complex to change them. All changes run the risk of introducing defects and potential vulnerabilities, so many banks have taken a risk averse approach. 

However, changes in consumer approach has forced banks to reevaluate how to make their services compatible with a digital world. Yet these adjustments have not  ensured significant changes as banks are layering  modern front-end technology onto legacy systems to bring existing products through these new channels. And more importantly, legacy banks have faced little competition over the years despite regulatory and government pressure. Consumer inertia was high and there was little incentive to move away from existing working systems.

Flaws in legacy systems 

Legacy systems can cause issues for both those working at banks and their customers. These issues generally fall under two factors: maintainability and flexibility. First: The cost of maintaining legacy systems will grow higher depending on how long they have been left without being updated. This is because the systems were developed with technologies that are no longer well supported and do not have large pools of talent that can address them. This means that the costs associated with keeping the systems working increase, further starving new investment into more modern systems. Second: As these systems are difficult to change, it becomes harder for them to become flexible with Industry and technology advances. 

Modern technology companies are entirely built around the ability to deliver lots of small changes quickly. Legacy systems and the technologies that they are based on make this hard; they are usually based on older ways of working that have long development and release cycles. Ultimately, it becomes challenging to leverage wider industry investment in new technology because they are hard to integrate or are incompatible with legacy systems and architecture.

Do legacy banks have an opportunity to fight back?

Banks want to maximise returns on IT investments and legacy systems are hindering the move to market with new products and services. Without fully embracing new approaches to how core systems are built and deployed, banks will not be able to fully leverage new and emerging technologies such APIs, artificial intelligence and machine-learning applications. 

However, the technology changes that have enabled new entrants are just as available to existing banks. In fact, these new approaches bring new challenges that traditional banks may be well placed to deal with. For example, managing a complex payments ecosystem that requires collaboration with lots of third parties across the value chain needs careful management, not only from a technology point of view but from a risk, compliance and regulatory perspective as well. Legacy banks are often well versed with deep rooted skills in navigating through such environments. 

Of course, it’s not too late for legacy banks to update their back-end systems in order to challenge their more agile FinTech counterparts. Some are already doing so, e.g. Bó, which is part of NatWest. While young people in the UK looking to open their first bank accounts may go with the more feature-rich mobile offerings such as Monzo or Revolut, they may also want a more established bank as well. Older account holders who have always managed their money with a traditional bank are still likely to be with one of them, especially if they have a digital bank on the side. The challenge for new entrants is to provide a suite of financial products that creates the stickiness between them and their customer, vying to become not just an additional account, but the primary account.  

Ultimately, legacy banks need to learn from challenger banks, and the major trends that have driven technological developments over the past decade, in order to survive. 

This could be done by collaborating with fintechs and combining efforts of those who have mastered the innovative technology and those who have mastered the banking process. This will present an opportunity for both new and legacy players. Like any industry, those companies that are able to iterate quickly, understand what their customers want and provide a trusted service—are the ones likely to prosper.

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