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Migrating from legacy to new banking systems

by Vilve Vene, CEO and co-founder of Modularbank

In 1983, the Bank of Scotland launched its “Homelink” and 37 years later it is still regarded as the pioneer of online banking.

Despite the evolution of banking and financial services, many banks still rely on a core banking system such as this, even though these systems were originally designed to respond to very different needs.

With the advent of cloud computing and new system architectures, the demands of the digital banking world have changed. While security remains as critical as ever, banks are expected to execute transactions in real time and develop new financial products or partnerships within weeks.

This is a major challenge and one that was thrown into the spotlight during the COVID-19 pandemic. In the UK, the chancellor introduced tax breaks, business rate cuts and mortgage holidays in an attempt to reduce the financial burden on consumers and businesses. This was great news for all except the banks which were left to implement an immense number of changes to policies and offerings. Many simply did not have the technology to bring these changes in quickly.

A recent survey conducted by Modularbank shows that for 90 percent of UK consumers, a modern technology offering is important when choosing their bank. But many banks are still dependent on legacy systems.

So how can banks respond to consumer demand for modern banking technology?

They have three options:

  1. Continue to rely on the established system

The easiest and cheapest option is to stick with the old system. However, this is Iikely to lead to numerous problems before long and is a false economy. Indeed, maintaining the system is expensive: a medium-sized bank uses about two-thirds of its digitization budget merely resolving the issues caused by using an old code base.

The code consists of many different layers that have not been updated to today’s standards, resulting in a spaghetti code: a confusing structure that nobody can understand except the programmers who retired years ago. In addition, there are no ‘new versions’ of old programming languages like Cobol. Ultimately banks wishing to show technology agility would be ill-advised to stick with their legacy systems.

  1. Rip out the old and switch to a new system

The logical solution is to completely replace legacy systems with an entire new platform. However, this is far from being an easy option. The process is extremely time-consuming due to the complexities of the system and before installing a new system, a sophisticated and well-thought out strategy needs to be devised. Important questions need to be answered for instance, what should the new system actually be able to do and what architecture will be required?

Aside from the complexity, the process is also extremely expensive and extensive. The German bank Apobank, for example, has invested a three-digit million sum in the switch and it took four years to launch the new system.

 The crux of the matter: during this changeover, the bank is technologically at a standstill. Innovations are impossible until the changeover is complete and banks risk comprising themselves and losing market share.

  1. Gradual migration to a new system

Instead of stripping out the entire core banking system at once, banks can gradually shift their services to a new system. As a first step, for example, banks can develop all new services on the new platform. This will allow them to gain initial experience with the new system.

If the first step is successful, banks can then gradually transfer not only new services but also their existing services. As soon as all services are running on the new system, the old system can be switched off. This process also takes several years, but the modular structure of modern systems makes it cheaper and more flexible. The bank benefits immediately from the changes and does not lose any time.

At the same time, banks can choose from the best systems on the market without developing a dependency on one provider. The modules from different providers communicate with each other via interfaces and are therefore generally compatible with each other – with relatively little manual work.

More than just a technology upgrade

However, a digital transformation is not merely a technological challenge. The corporate culture (including all employees), the structure and the management style also need to be ‘brought over’ in the transition.  The whole company must be involved in this far-reaching change – not merely the project team. Aside from the IT upgrades, old company guidelines, for example, may need to be revised. Indeed, just like the core banking systems of 1983, company culture and ways of working often originate in a different era and it takes courage and drive to bring about a new approach that fits with what consumers are looking for today.

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