Modernizing Legacy Banking Systems: Benefits, Methods, Strategies

Digital banking is one of the most promising areas in fintech development and, at the same time, one of the most resource-intensive. This is an area of ​​strict regulation and complex rules, not to mention high security and data protection requirements.

According to Statista research, by 2025, the share of digital banking users is expected to reach 80.4% of the targeted population. It means that banking legacy systems already need to be modernized entirely in order to keep up with customer needs and remain competitive.

Therefore, fintech companies that are able to respond to market changes and are willing to modify their systems despite the complexity of compliance and regulatory challenges have a significant advantage. Let’s discuss modernization benefits, best strategies, and techniques in more detail.

Benefits of Banking Legacy Software Modernization

The timely banking legacy software modernization has many serious advantages that significantly improve software operation in the future. Let's talk about the most important ones.

• Correct cost optimization. Timely modernization can significantly reduce the cost of providing services and software maintenance in the future. Often, outdated programs require much work to upgrade or even total replacement, which is much more expensive than investments in regular upgrades.
• Digital competitiveness and new opportunities. It’s just impossible to use the perks of artificial intelligence, modern data analysis, machine learning, etc., without timely modernization. It gives you access to various new digital products and allows you to add new digital features and enable the technologies that make your app competitive.
• Higher security level. Obviously, outdated software is more vulnerable to cyberattacks and data theft. Security standards, especially in Internet banking, are changing along with the technologies. Therefore, updating the system core allows you to meet the highest standards and protect customers and business.
• Business processes and data management improvement. Deploying new functionality increases application performance and positively impacts all business processes. Upgraded features are helpful for better data analysis, personalized offers creating, risk identifying, and customer service improvement.

Proper legacy infrastructure modernization also reduces regulatory compliance risks, increases software scalability and flexibility, optimizes resources, and boosts day-to-day operations.

Areas for Back-end Banking Transformations

There are four primary areas for back-end banking upgrading and transformation. It’s worth paying attention to the app architecture, databases, the capabilities of cloud technologies, DevOps/SecOps.

Architecture

Architecture modernization is a coordinated strategy that involves rethinking and improving existing software (features, components, requirements, etc.). This step makes legacy software projects more flexible and doesn’t require source-to-source migration.

Architecture optimization is a good solution for financial institutions when full changing the core banking system is too risky. In this case, the modernization process may involve

• architecture analysis, search and elimination of redundant systems;
• creating new risk and security management approaches;
• searching and implementing a new technology portfolio for more accessible and efficient maintenance (just like any other software development process).

Modernization in this area may involve the gradual separation of the banking architecture and the creation of a clear correlation between new business needs and the technical capabilities of the software.

Databases 

In most cases, data in legacy systems remain not collected at all or blocked. The harmful consequences of this are

• lack of opportunity to use new security and analysis technologies (artificial intelligence, machine learning, etc.);
• lack of access to innovative analytical solutions and predictive analytics (real-time business analysis, advanced Big Data analytics, etc.).

Working with databases and moving to an updated unified platform solves these issues. In addition to implementing database updates, developers can provide data migration. Banking legacy data modernization usually involves removing, transforming, and cleaning databases, as well as testing and loading them into a new system.

Cloud Migration

The migration to a cloud environment allows the banking software to get rid of outdated local systems, reduce the cost of upgrading and replacing equipment, expand scalability. At the same time, it’s not necessary to create cloud-based core banking solutions from scratch – you can integrate anything you need during the development and maintenance.

Cloud migration also allows non-banking companies to operate within the Banking as a Service (BaaS) model, opening opportunities for integrating digital banking into existing systems.

The transition can be complete or partial/gradual. The process usually includes assessing the existing infrastructure, technology portfolio and application needs, migration planning (supplier selection, strategy, roadmap creation), and its implementation, testing, support.

In general, the migration to the cloud environment for each product may look different because the banking system has individual characteristics and requirements. You can read about this process in our previous article.

DevOps & SecOps

DevOps and SecOps are the parts of a unified process that ensure quality and security. But they have individual goals, so let’s talk about them separately.

DevOps

The main goal of DevOps is to combine software development (Dev) and IT operations (Ops). DevOps shortens the systems development life cycle and speeds up a product launch, reducing time to market.

The process of such transformation is based on several principles, and some of them came from the Agile methodology.

• Automation. Development and delivery pipelines must be automated, focusing on repetitive processes to speed up the process. It also reduces the number of bottlenecks.
• Work with operations taking into account future needs. In the early stages of the software development lifecycle, it’s essential to introduce as many important OPs and quality assurance as possible. It reduces the cost of future transformations and upgrades.
• Metrics and feedback. It’s essential to follow the basic software metrics, such as change failure rate, deployment frequency, delivery lead time, etc. Regular review of metrics and feedback allows properly evaluating the software and successfully investing in its subsequent improvements.

DevOps is essential for software development process unification and core banking platform transformation. It’s the step towards greater performance.

SecOps

SecOps is a set of practices that connect IT security (Sec) and operational teams (Ops). In this case, the main goal of developers is to integrate technologies, processes and testing procedures to ensure data and systems security. They design compliance requirements, which significantly reduce risks and increase business flexibility.

Banking Legacy Software Modernization Process

In most cases, the banking legacy system modernization is a transition from a traditional format to an up-to-date cloud solution. Therefore, it can usually consist of the following stages.

Architecture Audit

Technical stack assessment and architecture audit is the first step in the processes of banking legacy system modernization. Initially, developers analyze technologies, programming languages, frameworks, etc., to determine their relevance and suitability for use. It depends on this process whether the software will be fully transformed or only some parts of it will be updated.

An audit of the existing architecture is another part of this step. It allows you to identify elements of the application that need to be upgraded, as well as components that can function without change. Developers also identify essential connections between architectural elements to assess the future impact of upgrades.

Code Review

Сarefully code review before implementing any updates is a must. In most cases, the outdated banking system has too massive a codebase that requires refactoring. Regular reviews help avoid conflicts and bugs when implementing new features, updates, etc.

UX\UI Review

User interfaces and software interaction experience must be up to date too. Therefore, UI and UX design should be reviewed and changed following new needs and trends when upgrading the banking system. It helps make the software more user-friendly, improve the user's journey and make the application more attractive to potential clients.

Rebuild Databases

The process of rebuilding databases involves unloading and reloading the entire database. This is a special type of import and export, which consists of collecting all the information from the database and returning it uniformly. The definition and schema of tables in addition to the data are imported.

In modernizing legacy systems in banking, rebuilding databases improves productivity and prepares the product for updates or migration to the cloud.

Migrate to the Cloud

Cloud migration is the transition and deployment of software infrastructure, data and workloads to the cloud service provider. This process is necessary for every financial institution moving towards modernization and digital transformation. It enhances legacy systems with APIs, scalability, and flexibility.

The migration to the cloud phase includes creating a detailed roadmap, choosing a cloud service provider (Amazon Web Services, Google Cloud Platform, Microsoft Azure), resolving compliance issues, choosing a migration method and strategy, testing, etc.

Test Migration

Testing is an integral part of database migrations. The correct migration test allows you to assume that the banking system is working in the new environment without any problems and check the program's workflow.

Testing aims to identify bottlenecks, optimize, and identify missed problems during the development stages. This process helps ensure the compatibility of new components with old parts of the software, the operation of all new features and troubleshooting.

Migration testing consists of three phases – pre-migration, migration and post-migration. It can be held in automated or manual format.

Legacy Banking Systems Modernization Strategies

Choosing a strategy for modernizing the legacy banking system is a critical component of effective management of the transformation process. It depends on the selected model whether the changes will be made correctly, whether the budget will be used properly and whether it will be easy to maintain the functionality in the future.

There are several common strategies in this direction. The choice depends on the software's purpose, its condition, and the rate of obsolescence.

Architecture-Driven Modernization (ADM)

Architecture-Driven Modernization strategy, the essence of which is to understand and develop existing program assets (components, requirements, features, legacy infrastructure in banking, etc.) in order to modify and improve them. ADM may also include increased interoperability, restructuring, SOA (Service Oriented Architecture), MDA (Model Driven Architecture) migration, etc.

This approach has its advantages. Modernization occurs through software analysis and design, not in the format of source-to-source migration. Because ADM is a strategy in the form of language independence and interoperability, it improves flexibility, agility and transforming possibilities.

SABA 

SABA is a high-level multi-layered framework used to manage organizational and technical processes while transforming outdated software and building a data protection and security system.

The SABA iterative method helps optimize solutions and upgrades, resolve outdated system issues, and predict future upgrade results. The framework’s controls ensure the integrity and availability of data and services.

Reverse Engineering Model

Reverse engineering is forming a data model from a script or database. It consists of creating a graphical representation (a logical or a physical model) of selected database objects and their relationships.

Reverse engineering is needed to understand database structures and asset the relationships between objects. After completing this process, developers can add new objects to the database, redesign their facility and create a documentation system.

The reverse engineering strategy in banking legacy system transformation lies in transferring outdated software to a new environment. After data migration, access to obsolete databases is provided by the reverse gateway. For large-scale and long-term projects, such a solution can be very profitable. It allows you to keep up with the technological pace and preserve the system's functionality.

Visaggio’s Value-based Decision Model (VDM)

Visaggio’s (VDM) value-based decision-making model combines economic and technological indicators analysis and evaluation to find the best software-specific legacy modernization solutions in banking. The main goal of such a strategy is to find the most appropriate software update processes and tools based on the characteristics of all its components and the unique features of each case.

As part of such a strategy, the system is divided into segments, the leading indicators and target levels are determined, including dead data or anomalous files. Each change can be assessed individually, and clear priorities for mobilization can be identified.

Such a system is effective when the outdated system has low economic and technical value or is economically efficient but lags far behind technically.

WMU (Warrants, Maintenance, Upgrade)

WMU (Warrants, Maintenance, Upgrade) is a model focused on customer needs and wishes. The choice of service strategy is based on the desired level of impact on the user and level of clients’ satisfaction.

In order to use this strategy in the banking legacy system modernization, it’s necessary to analyze the quality of services, customer satisfaction index, expectations, competitors metrics, etc. The following maintenance and updating of the software occur based on this analysis.

Banking Legacy Modernization Methods

There are two main approaches to banking legacy system modernization: revolutionary and evolutionary. In both cases, the software is updating and developing under the influence of approximately the same factors, but the methods of solving problems can be different. Let’s talk about this in more detail.

Revolutionary Method

The revolutionary method of legacy banking software modernization involves the complete replacement of outdated systems and the implementation of new ones from scratch. The old software is completely shut down and no longer used. It is quite a decisive step, so the decision to use it must be made based on in-depth professional analysis.

When can the revolutionary method be advantageous? In cases where the original program can’t meet existing safety and quality requirements and isn’t suitable for implementing new business solutions. Often outdated systems are inadequate for upgrading, re-architecture, or re-engineering.

So, in such cases, it’s easier to create new software from scratch to avoid security breaches, system crashes, data loss, etc.

Evolutionary method

Unlike the revolutionary, the evolutionary method is much less radical. This approach involves the gradual modernization of the system when the process of updating and making changes is systematic and step-by-step.

Among the main advantages of this approach is the ability to make changes without disrupting business processes. Also, the evolutionary method involves much less risk to the system and the company as a whole.

However, there are some challenges. If you make changes bit by bit, it’s crucial to keep up with tech development and new requirements. In addition, due to the connection with the old systems, there may be some compatibility issues that will require time and money to solve. It’s also essential to pay special attention to security issues, as outdated systems may have problems in this area.

Therefore, in the evolutionary method, it’s crucial to eliminate the factors that cause problems and monitor the effects of updates.

Legacy Banking System Modernization Techniques

What do you need to know about existing banking legacy modernization techniques? They affect different system parts and require different approaches. Choosing different techniques to solve technical/infrastructural problems or interface issues is necessary. Let's find out what options and for what purposes can be used.

Encapsulation

Encapsulation means reusing legacy banking software components involving the wrapping technique. Code remains in the current environment, but the component gets a new interface. It makes encapsulated components accessible to others, including newer software components and their layers (usually via API).

Encapsulation in most cases concerns only the capabilities of the interface, not internal system changes. Therefore, compliance, maintenance, and upgrade issues can not always be resolved. However, you can expand the functionality of outdated software or increase the program's value.

It’s also worth noting that the fewer changes in the code, the less risk of damaging an outdated, but still valuable from a business point of view, system. So if the software has a quality code base but requires minimal changes and or interface improvements, encapsulation will be a great solution.

Rehosting

Rehosting is a modernization technique that involves moving a program to a new virtual/cloud environment. It’s often called "lift and shift" because the software itself, its infrastructure, and essential functions remain unchanged. Still, it becomes more flexible, gaining access to cloud functionality and a more modern environment.

In simple exaggerated terms, it’s a transfer of computing power, network, storage from the local to the cloud service provider (CSP). Users of the banking system have access to all functions, including payments, without changes. Also, the security and compliance properties aren’t changing, which is especially important for banking software.

Thus, rehosting modernization is a relatively inexpensive way to quickly, efficiently scale, update, and improve. All crucial components (business logic, infrastructure, compliance) remain unchanged, so the company's work doesn’t stop.

However, it should be noticed that the rehosted system should still be improved and upgraded in the future. Therefore, this cannot be a long-term solution.

Replatform Migrations

Replatform migration is also called "lift, tinker, and shift" because the basic app architecture remains unchanged, while it requires minimal changes to adapt the codebase to the new platform (updating versions, adding automatic scaling, updating components before migration, etc.).This technique helps transform legacy software to work correctly in the cloud, improve the user experience, simplify the database management process, and increase security.

In essence, this is a more advanced version of rehosting, in which the system isn’t only transferred to a new environment but also passes through the necessary changes. Therefore, this option can be considered as a long-term solution.

Code Refactoring

Code refactoring means changes in specific software components, namely their code, without changes in external behavior. Engineers are optimizing and restructuring the codebase to improve the functionality and structure of individual components or the entire application.

Refactoring opens access to built-in cloud functions, improves the efficiency of operating costs, updates the codebase for further changes.

Rearchitecting

Rearchitecting is a method of completely rethinking the existing architecture of the banking system, replacing the code to access new platform features. In other words, this is the reengineering of the system in a way to improve its functionality.

Banking software must eliminate an outdated internal system by restructuring it to integrate new technologies and perform scaling in new ecosystems. The most obvious example of rearchitecting is the transition from monoliths to microservices, which you can learn more about in our previous article.

Rearchitecting is an excellent solution for partnerships and the integration of third-party resources.

Rebuilding

Here everything is simple and plain. Rebuilding, or as it’s also called redesign, is a method in which components of the banking system are rewritten from scratch. However, all their specifications and scope remain unchanged.

Why is this useful? In this way, you can update the program's design to prepare it for the new functionality implementation. Rebuilding also helps to implement features that use the capabilities of third-party platforms. The scale of rebuilding can vary; sometimes, only some parts of the application are affected.

Replacing

As its name suggests, this is a complete legacy banking system replacement with a new one. In this case, it’s impossible to use the business logic of the old system, but its base and some package settings can be used for reengineering.

When could you need this? When an outdated system can no longer perform its functions, is not suitable for updating and implementing new technologies, has no severe business value. In such cases, it’s much easier to replace it than to try to revive dead software completely.

Final Thoughts

The main conclusions are: 

• Banking legacy systems desperately need timely modernization. It affects not only the quality of the provided service but also the security of the software, the cost of its upgrading and maintenance in the future.
• The main areas for back-end banking transformations are architecture, databases, cloud migration, Dev/SecOps. Every area has its own nuances.
• There are many techniques, strategies and methods for banking software modernization. You need to choose the right one taking into account the features and challenges of a particular system, and it’s better to use experienced developers.

Upgrading the operating system and fighting the harmful effects of outdated technology is quite a challenge. However, it’s impossible to begin your journey to complete transformation without this step. So, don’t spare time and money for timely updates. This is an investment in the future of your business.

We, for our part, will be happy to answer all your questions. Just contact us in any way convenient for you.

F.A.Q.

How much does it cost to modernize the banking legacy system?

The cost of upgrading the banking legacy system depends on many different factors. This can be the system's state, desired results, app scale, etc. Also, additional costs may be required for supporting, maintaining, and implementing legacy software, maintaining or upgrading the database, ensuring security for data, and so on.

You can plan a budget only after analyzing and market research. We will be happy to help you with this.

When should I replace my banking legacy system?

Banking systems often become inflexible and cluttered due to regulatory difficulties in the banking sector. Of course, the earlier the modernization process begins, the better because financial services such as loans, payments, account management, etc., require high speed and reliability.

Sometimes it’s enough to make minimal updates and improvements; in other cases, it may be necessary to replace the entire system. So, the time when you should start upgrading depends on the condition and age of your system, as well as the date of the latest changes. If you understand that your software no longer fulfills business needs and doesn’t allow you to provide high-level services, the time has come.

Does your team have enough experience to modernize my banking system?

We have a strong team of developers who have extensive experience developing fintech applications, including banking. Check out our projects here.