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Digital Banking

Banking Tech Stack Modernization: Overcoming Legacy Spaghetti Challenges

Banking Tech Stack Modernization
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As banks try to keep pace with rapidly evolving technology, their tech stacks begin to resemble spaghetti: a tangled mess of outdated technology and complex integrations that prevent innovation and agility. To stay competitive in today’s market, organizations need to update and streamline their banking tech stack. How? Read on.

Legacy System Modernization Strategies in Banking

Banking technology is cloud-bound. According to a 2022 Accenture report, 4 out of 5 banks plan to move more than half of their mainframe workloads to the cloud. Almost 1 in 4 plan to move more than three-quarters of that workload. And most aim to do it in the coming five years.

But the reality for many banks right now is legacy spaghetti, where older and outdated software systems and apps are interconnected in a complex and tangled way. Other things over time, like point solutions and upgrades, have been added and then integrated on the backend of organizations. It results in a tangle of technologies — like spaghetti — that impedes modern banking operations, limits agility and integration, raises maintenance costs, slows data efficiencies and heightens security/compliance risks.

Risks and Challenges of Untangling Legacy Spaghetti

Five to ten cents out of every dollar. On average, that is how much out of every dollar spent on technology that provides additional business value, according to McKinsey. The majority of the remaining amount goes to servicing and managing a legacy banking system, implementing updates and trying to limp a legacy mainframe system through another quarter.

Clearly, there is as much risk in staying with a mainframe system as there is in upgrading. Some of those risks include:

1. Dependencies. This is part of the “spaghetti.” It is difficult to know, in legacy systems, how to disconnect one part from another without breaking the whole thing. Complexities and interdependencies that have evolved over time can lead to operational disruptions, as can making changes.

2. Data migration. When attempting legacy system transformation in banking, data migration and integration can be a challenge. This is especially true when dealing with large volumes of data, and data integrity is critical.

3. Legacy system compatibility. If the new system needs to be compatible with the legacy system, as is often the case, real obstacles can emerge. It may require significant customization and development efforts to overcome them.

4. Change management and cultural shift. When discussing technological changes, banks cannot forget that people play a key role in their success or failure. Changes in processes and workflows require buy-in from employees to succeed.

5. Security and compliance. Inevitably, technological change comes with security risks that, if not managed, can lead to data breaches and financial losses. If breaches occur, they can even lead to reputational damage to the bank.

6. Opportunity cost. Today, agility is key to building a competitive advantage. The payments landscape is evolving with the popularization of digital wallets, contactless payment and crypto payments. Customers want real-time payments and transfers, but legacy systems usually lack the infrastructure needed for seamless real-time payment processing. Banks need to respond to the demand for real-time payments in a way that feels very personal for the end user. Modern banking technology, including an advanced banking technology stack, is crucial for this. Legacy systems, which often store their data in silos, cannot keep up with these demands.

Navigating the Modernization of Banking Systems with AI and ML

Despite the fearmongering, artificial intelligence and machine learning will offer exponential leaps in data efficiency. Consumers are awash in data, and AI and ML can analyze and personalize that data in the form of chatbots, recommendation engines and predictive analytics.

Leveraging AI and ML will allow financial institutions to process huge datasets quickly and efficiently, and it will give banks strategic insights and the ability to provide greater customer personalization. Additionally, in the race between fraud and security, payment systems can use biometric data like facial recognition to improve security and payment authorization. Finally, techs like APIs, microservice architecture, cloud computing, agile and DevOps methodologies and robotic process automation will continue to rise in importance.

Yet, banks need to be cautious when embracing tech transformation. Changes are expensive, disruptive, scary and frankly risky. Banks need to think about an ideal future state and design or identify a unified platform — the opposite of legacy spaghetti.

Navigating Technology Transformation in Banking

If tech stack change is both challenging and inevitable for banks, how do they achieve it? How do they untangle the legacy spaghetti? Here are some legacy system modernization strategies:

1. A clear plan. Banks need a comprehensive plan with a clear vision and strategy for tech change. They also need a detailed road map for how and when the change will occur.

2. A phased approach. Financial institutions need a phased approach with incremental migration broken down into various stages. They also need a robust rollback plan in case of problems.

3. Change management. Change management and training are crucial. Banks need to clearly communicate changes and expectations to employees during tech stack changes.

4. Data migration. Banks need robust data migration and integration strategies to ensure seamless data transfer from the legacy system to the new platform.

5. Continuous monitoring. Financial institutions need monitoring and support to track the performance, stability and security of the new system.

Bankers stress the importance of trust in banking relationships, but younger generations are more interested in a customized and personalized banking experience than in institutional loyalty. That means that legacy tech stacks — and the legacy spaghetti that goes with them — have to go.

The modernization of banking systems is critical. And banks with legacy systems need to choose a vendor that will act as a strategic partner with a road map. They need someone they can partner with and grow with to collectively fulfill demand.

At i2c, our platform is a customized offering that can seamlessly integrate with any existing platform or third-party service provider. Additionally, our global footprint facilitates the broadest ecosystem connectivity. Compared to other solutions, i2c can couple our core banking solutions with our advanced payments solutions to provide you with a one-stop-shop solution.

i2c’s advanced core banking solutions enable you to offer a robust digital banking experience, loaded with features, to any account holder — from individuals to large commercial customers — as a standalone offering or as an integrated complement to your banking core.

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