An International Data Corporation (IDC) sponsored report by Thought Machine entitled, “Digital Core – Now Is The Time” revealed that 95% of banks in the APAC region are still running on second or third-generation banking technology, which severely limits their ability to innovate while increasing costs.
Moreover, the average age of core banking technology in Asia is around 20 years. This imposed technology gap for infrastructure is increasing banks’ cost-to-income (C/I) ratios by 3% – 5%. The limited ability to automate processes and decisioning adds another 4% – 7% to the C/I ratio.
The report further stated that banks that are not ready to migrate to the fourth-generation organic digital core technologies are unlikely to meet their digitalisation objectives, and run the risk of facing threats by more digitally advanced banks in upcoming years.
It is known that many banks today are still using legacy software systems, even though other industries have adopted newer technologies. In fact, there is an aptly named jargon called “software spaghetti”, which is used to describe the backstage tech situation of most banking software. In short, software spaghetti is the result of a lack of thorough planning, an unclear view of the scope of work, not following programming style rules, or old code being modified by multiple developers throughout the years. In legacy banking systems, thousands of applications are patched together through multiple vendors and various technologies, with some of the most critical platforms dating back to the 1980s. Cash machines are still running Cobol, a programming language written in 1959. This raises the question, “why are financial institutions (FIs) still using legacy software?”
The Challenges in Upgrading Legacy Systems
There are several reasons why banks may have yet to fully embrace newer technologies.
- Spaghetti Systems
The migration of critical banking solutions is easier said than done. As aforementioned, most legacy systems are built by piecing multiple solutions together upon outdated architecture, which means that any implemented changes will have a significant impact across various processes. “Continuous extensions with new features and stand-alone solutions, as well as interfaces to other applications in legacy IT, have often created a jumble of dependencies over the years, with no transparent structure or logic,” wrote Stephan Kliche, a client technical architect at knowis AG, a German specialised software vendor for the banking industry. “This increases the complexity and leads to an intricate system landscape that resembles a plate of spaghetti. An uncomplicated migration to new versions or other providers is hardly possible.”
- Banking Regulations
There is a method of code improvement that businesses use called Continuous Integration and Continuous Deployment (CI/CD). This is where code is updated regularly over numerous tiny improvements, rather than one colossal update every few months to a year. If the code works as intended, it is retained. If it does not, the version is rolled back. Amazon employs CI/CD, by updating its code every 11 seconds. This method allows businesses to innovate at a faster pace and respond quickly to market changes, which in turn generates a better customer experience. This is a viable solution for most businesses, as they can execute continuous production releases and rollbacks for features that do not work or risk downtime in a worst-case scenario. However, a failing feature in banking is not appropriate as bank regulators do not support this business practice in banking.
- “If it’s not broken, don’t fix it.”
Ageing legacy systems can still perform most businesses’ day-to-day tasks. Therefore, some businesses choose to continue using their legacy systems until it breaks. In the past, this was perceived as a “cost-effective method” by obtaining the highest possible value out of an investment. However, newer technologies are also capable of performing day-to-day tasks and more, all while minimising the risks involved in maintaining legacy systems.
According to the UK’s Financial Conduct Authority (FCA), nearly 50% of banks refrain from upgrading their legacy systems as soon as they should.
“Financial institutions are museums of technology dating back to the 1960s. The complexity makes it impossible to manage risk.” ― EY Bank Governance Leadership Network (BGLN) participant
The Risks In Maintaining Legacy Systems
Cybersecurity is crucial in ensuring the security and success of the financial industry. FIs in particular are among the targets of hacking activities and financial crimes. Legacy systems are especially vulnerable to attacks as they are no longer supported by the vendor or company, which means that the software will not be protected against newer threats. Thus, having a plan to protect the IT infrastructure and customer data to avoid disruption is essential.
- Increasing Maintenence Costs
FIs have to face the issue of either maintaining their legacy systems, or upgrading completely to a new software or platform, both of which are costly. In the long run, however, the route of maintaining legacy systems will be more costly the longer these systems run without being updated, which would put further constraints on the budget for newer software investments. Furthermore, newer technologies are built around the ability to be agile, where small amendments or updates can be delivered quickly, whereas legacy software is developed based on longer development and release cycles. This means that for those who decide to stick with legacy systems will have a hard time leveraging opportunities that come with newer technology because they are hard to integrate or are incompatible with each other.
- Dwindling Talent Pool
The need to digitalise banking services is also affected by the growing shortage of legacy talent. When these talents retire, it leaves behind a major skill and knowledge gap, therefore increasing the demand for legacy business experts higher, further driving up costs for businesses. Furthermore, top technological experts nowadays have little interest in working with archaic systems and platforms, making it harder for FIs to attract and retain legacy talent.
The Need To Upgrade
Banks have realised that their future commercial viability may depend on their capacity and speed to replace legacy systems. They want the ability to continuously integrate with the latest technologies, and come up with newer ways to improve customer experience that previously was not viable with their legacy technology.
There is even an agreed methodology to modernise. Instead of running applications with a monolithic code base, banks should divide them into pieces called “microservices”. Each microservice can operate on its own, with staff focused solely on their own subdomain, meaning that updates can be completed considerably quicker.
Reasons Banks Should Upgrade Legacy Systems
There is a multitude of reasons for banks to upgrade their legacy systems, including:
- Enhanced Digital Readiness
Upgraded banking systems can fully utilise the capabilities of modern digital features such as artificial intelligence, machine learning, data analytics, cloud computing, blockchain, and more. Moreover, modern platforms that use modern programming languages will be cheaper and easier to maintain and improve in the future.
- Optimised Business Costs and Operations
The modernisation of banking systems can also help FIs optimise their sourcing strategies by capitalising on commercial platform vendors’ expertise. The improved user experience, productivity and efficiency can also help scale business economies, increase revenue, and improve customer satisfaction and product innovation.
- Institutional Knowledge Transfer
Moving from legacy systems does not mean that banks have to start anew, as banks can import their years of institutional knowledge onto modern industry-standard software. This treasure trove of experience coupled with modern banking software systems allows banks to offer innovative banking services that are more streamlined, standardised, and scalable in both directions to cater to the ever-changing market demands.
JurisTech, Your Preferred Partner
Here at JurisTech, we pride ourselves on our banking software solutions that are capable, scalable, and future-ready. We can solve your “spaghetti” issues by catering to your business needs, or completely overhauling your existing banking systems, leaving you with a clean fourth-generation banking system that adheres to banking regulations, with continuous improvement capabilities.
Our solutions are created with our clients’ needs in mind, as our process starts by understanding the client’s business and operation goals.
Here are some of our capabilities:
- Product Design and Development
Our R&D and product teams prioritise innovation in all of our solutions, ensuring that each one complies with industry standards.
- Project Delivery Capability
We ensure your peace of mind by offering extensive support for pre, during, and post-project implementations.
- Help Desk
Our cooperative help desk personnel are always ready to help you through any issues or questions you may have at any project lifecycle, ensuring your support needs are met and fulfilled.
JurisTech (Juris Technologies) is a leading Malaysian-based fintech company, specialising in enterprise-class software solutions for banks, financial institutions, and telecommunications companies in Malaysia, Southeast Asia, and beyond.