Revamping Legacy Banking Software: Step-by-step Guide

In its study “Financial Services Technology 2020 and Beyond: Embracing Disruption”, PwC identified key priorities financial institutions must recognize to succeed in this increasingly digitized era. Modernizing legacy systems and updating information technology (IT) operating models are among the most important boxes to tick in a to-do list.

In this article, we will explore why modernizing banks’ legacy systems is not just a trend, but a must. We’ll also look at how to approach legacy banking app modernization, what benefits it offers, and which areas are priorities in banking system revamping.

Benefits of Modernizing a Legacy Banking System

Upgrading a legacy platform is a daunting task, but it can’t be avoided if banks and neobanks want to stay in the market and thrive. While the high costs of transformation have held back most banking organizations, the benefits of legacy modernization outweigh them:

• A new level of digital capabilities. Artificial intelligence, machine learning, data analytics, cloud computing, blockchain, and other technologies cannot be leveraged on the basis of an existing platform.
• Streamlined business processes. Sometimes the integration of custom, leading-edge software into legacy systems is very time-consuming and labor-intensive or even not possible. For example, old systems don’t have built-in data pipelines that can leverage the latest analytics tools. This is a substantial drawback that 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.
• Less regulatory pressure. Financial institutions with a presence in multiple markets must comply with a whole host of regulations. This requires robust digital solutions across the financial services enterprise. Developing APIs for legacy financial services software is not as easy 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. Aside from licensing costs, legacy banking apps require an additional software layer to integrate with newer technologies. It must be built on top of a core system, which is a substantial investment, and even after completion, it is not guaranteed to work efficiently.
• Capitalizing on data. Upgraded banking software uses a far more efficient approach to data management. It ensures that no revenue is lost where it can be earned. This way, banks can offer customized products and services based on customer data analysis.

How to Approach Legacy Banking App Modernization

You’ve already understood that legacy systems are hindering your business initiatives and need to be updated. But where to start? We recommend you follow this strategy step by step.

STEP 1: Evaluate Legacy Systems Using Six Drivers

There are six key drivers (issues, concerns, or impediments caused by the legacy application). Three of these drivers are connected with business processes, and the other three — with 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. It’s time to upgrade if the total cost of ownership is too high, the technology is too complex, or security, compliance, support, or scalability are being compromised.

STEP 2: Evaluate Modernization

Look at the modernization options. Gartner ranked them by the ease of implementation. The easier it is, the less risk it entails.

1. Encapsulate — extend the application features by making its data and functions available as services through an API.
2. Rehost — redeploy the application component to other infrastructure (physical, virtual or cloud) without changing its functions, features, or code.
3. Replatform — migrate to a new runtime platform, making minimal changes to the code without editing its structure, functions, or features.
4. Refactor — restructure and optimize existing code to eliminate technical debt and improve non-functional attributes.
5. Rearchitect — modify the code to shift it to new application architecture and take advantage of new and better capabilities.
6. Rebuild — rewrite or redesign the application component from scratch while still preserving its scope and specifications.
7. Replace — eliminate the former application component altogether and replace it along with considering new requirements and needs.

STEP 3: Choose the Modernization Approach with Highest Effect and Value

You need to select the modernization approach by mapping the seven modernization options in terms of their impact on technology, functionality, architecture, cost, and risk. Simply put, modernizing legacy applications means choosing between re-architecture, rebuild, or replace. Re-architecture is better in terms of cost and risk, while rebuild or replacement delivers the best results, but carries higher cost and risk.

STEP 4: Choose the Most Advanced Solutions

To see the positive impact of modernization, make sure your software development team is using a reputable and best-in-class web or mobile technology stack. The technologies and tools you choose should match the unique features of the product and your business goals. It’s important to work closely with your in-house engineering team or seek advice from an experienced financial services consulting firm.

STEP 5: Outline a Post-Modernization Strategy

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

Also, consider how your employees will adopt your new system. They may need some time and support to get used to it, so be prepared to invest in workshops to speed up the process and boost their performance.

Priority Areas for Banking System Revamping

From the backend viewpoint, legacy systems need to be revamped in 5 different areas.

DevOps/SecOps

DevOps is about bridging the gap between development, operations, and quality assurance. It helps reduce time to market for new products without compromising their quality.

The key DevOps principles you should follow:

• Introduce more operations and quality assurance in the early stages of the software development lifecycle. This will help you minimize the risk of costly rework later on.
• Systematically automate development and delivery pipelines to avoid bottlenecks and speed up workflows.
• Keep a close eye on core software metrics: delivery lead time, deployment frequency, mean time to recovery, change failure rate.
• Collect feedback, review metrics, and continually invest in additional processes.

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

IT Architecture Optimization

Sometimes fully stepping away from the legacy core isn’t feasible for most banks because the risks are too high. The alternative is to gradually decouple and modularize a banking IT architecture. A strong IT governance process is key to a successful evolution. It 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

In legacy systems, data remains stranded or uncollected. As a result, banks cannot compete with digital players, deploy innovative analytics-driven solutions, or experiment with predictive analytics, AI, and ML.

With their legacy systems, banks also cannot perform real-time business intelligence and advanced Big Data analytics without a strong data management platform.

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 thing about updating a legacy system is to protect the data that already exists 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 tech blocks to your banking app opens up new prospects for revenue growth. Take a look at the features that will help you to stay competitive and profitable in this decade.

• Decision analytics engines. It helps to power up decision-making and supply personnel with the right insights at the right time. AI-driven decision intelligence use cases 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. Such credit scoring models perform better than traditional ones (that use both traditional and alternative data) in predicting borrowers’ losses and defaults. ML-based models are also better at predicting losses and defaults over time following a negative shock to the overall credit supply. In addition, they improve their performance 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
• Cellular network
• Combination of AI and blockchain technologies. Together, they increase security thanks to inherent encryption, allow companies of all sizes to access the same pool of information as tech giants, and optimize data mining energy consumption, which will lead to lower mining hardware prices. Blockchain alone provides a secure and cheap way of sending payments that cuts down on the need for verification from third parties and beats processing times for bank transfers.
• Voice assistance. Some bank virtual assistants are already voice-activated. They can offer a faster way to get answers to questions about your bank account without typing. What’s more, voice-activated banking virtual assistants can make it easy to quickly transfer money or make payments.

How to Choose a Banking Developer

Finding the right banking software development company may be a rather difficult and time-consuming task unless you know the key criteria to look at. Take a look at a few important factors you need to consider.

Previous Experience

The primary measure of success is the projects carried out by the company. Do not hesitate to check the company’s fintech project portfolio to see what types of products the team has worked with. The more experience in a variety of projects, the better the expertise. Engineers can also come up with new ideas based on what they have learned from previous projects. You can also ask for references from past clients and look at their feedback.

Technical Expertise

Your IT partner should have a dedicated team of experts who are well-versed in all aspects of software development. It involves a firm grasp of coding knowledge to write clear and error-free codes, as well as knowledge of the various programming languages and frameworks used in developing financial solutions. Also, your developer should be familiar with the latest trends in the financial industry.

Cybersecurity

This is the biggest concern when developing fintech software solutions, as a small mistake can drastically affect your business. A reliable fintech software development company prevents security breaches and mitigates risks in the core architecture of the product. It is important to make sure that the IT company is familiar with sensitive data protection best practices and adheres to the relevant rules and standards such as PCI DSS (Payment Card Industry Data Security Standard) and OWASP (Open Web Application Security Project) while developing your product.

Risk Management

When selecting your development partner, make sure the company has a risk mitigation plan in place to avoid future problems. Some common risks in fintech software that your IT partner should be able to mitigate include:

• Malware attacks
• Broken authentication
• Cyber breaches
• Server failure
• Buffer overflow
• Broken access control

In addition, your fintech outsourcing agency should provide you with product support services till your team gradually gains full control of the product.

Summary

By maintaining outdated legacy systems, you miss opportunities to invest in projects that move your business forward. That means you create opportunities for your competitors. Only through continuous upgrades can you capitalize on growth opportunities and receive steady revenue from your bank. As a reliable IT partner, we can help you do that.

Originally published on Itexus Blog on October 6, 2021.