Banks were already under pressure to decrease IT expenditures before the outbreak of the COVID-19 pandemic because of the continuing low-interest rates. The pandemic worsened this problem because of the need for banks to supply new digital IT systems, like Flexcube quickly and at a cheap cost.

Both of these developments have prompted financial organizations to rethink how they’ve been modernizing their aging IT systems. Risk, finance, and regulatory compliance, which were formerly considered sacred, are now under review.

To simplify and expedite project completion, banks are now using a new modernization strategy based on six guiding principles. The data stack, the core systems, and the surrounding systems are all part of a complete endeavor. As a result, companies have reduced the time and expense of their transformations by 70 percent while still reaping the same advantages.

Six principles of successful legacy modernization

Following an exhaustive review of more than 50 IT conversions, we were able to distill six key takeaways for banks looking to address the many facets of their legacy systems.

1. Leave data at the edge, and build a flexible data platform over time rather than starting from scratch.

Before, financial institutions opted to consolidate their data into a single, massive data warehouse. With streaming databases and a data mesh, banks can move more swiftly by keeping their existing data assets in their present place and focusing on constructing better interface layers using Oracle Flexcube universal banking. The data architecture of one of the world’s largest banks was modernized at a massive scale, yet the bank saw little benefit. To keep the program focused, managers opted to limit it to assuring access to the program’s “golden sources” of information, which are the well-defined sole sources for a particular kind of information in the system. Doing so lowered the program’s cost by two-thirds and cut the entire implementation period from five to three years.

2. Hollow out the core, and migrate customization to microservices.

The core may be completely eliminated by banks. All new work may be concentrated on the surrounding systems and microservices with this strategy. IT may move non-core functionality to microservices and then decommission the remainder of the application if it makes sense to do so. One bank, for example, upgraded its account-management system by gradually removing fundamental functions like account names and interest rates. It was a lot simpler to modernize the rest of the functionality after this point.

Prioritizing capabilities to enable new client journeys is in keeping with this idea. Even though the fundamental banking system utilized by a large digital attacker was more than 20 years old, it employed a comprehensive API layer to support its future technologies. A two-year implementation program would have been prohibitively expensive for the bank under this strategy.

3. Do not perform an arbitrary system modernization, but clearly categorize and modernize capabilities required for customer journeys.

Institutions often invest in new capabilities without having a clear understanding of how they might better support a customer’s journey, which results in wasted money. Investing in additional capabilities only makes sense if you’re planning a client experience that demands them. An end-to-end enabling strategy that incorporates micro front ends and an emphasis on front ends will allow banks to move much more quickly toward this goal.

Several major banks have begun to upgrade their systems. In order to lower total expenses, executives have to first identify the competencies needed to establish a customer journey. As a result, the IT department was able to speed up the implementation of new trips dramatically.

4. Prioritize integration over simplifying systems.

First and foremost, in most legacy-modernization projects, the goal is to simplify systems and applications. A better approach is to start with integration and then simplify. Banks may only begin restructuring and decommissioning obsolete apps and structures with the necessary APIs in place.

In the case of a big worldwide bank, for example, a massive IT cost-reduction trip was started. The IT department was able to minimize costs without reducing the number of apps by building an API layer.

5. Move all non-differentiating functions to SaaS

It is common knowledge among the most successful companies that they may combine several functions in order to get a competitive advantage. Other than that, IT may shift business applications to SaaS or at least to PaaS platforms, ensuring uniformity and simplifying updates. If this move is successfully completed, companies may also want to explore cloud add-ons and additional capabilities in order to increase productivity.

Cloud-based HR software was implemented by a large financial organization. Using this implementation, IT was able to considerably reduce the back-office personnel responsible for the system’s management by 50%.

6. Build global platforms, but allow local customization.

Many organizations have enabled regional or national decisions on platforms to be made, which is a method that adds complexity when none is needed. Global platforms for channels, core banking, and data have become popular among leading financial institutions. In order to allow nations to apply their own parametrizations, they must provide them with permission. Standardization of basic banking and distribution channels across seven geographical regions, for example, has been achieved by a large banking organization.

Standard off-the-shelf solutions have been extensively utilized by banks, particularly in the market process chain (i.e., front-to-back to risk, including Treasury and Finance). It is not just a single nation that uses these sites, but rather the whole world. According to one example, a large global bank is implementing a global retail platform with local adaptations of product parametrizations, and custom front ends in order to reduce IT operational costs in the retail sector by 20%.

The new cost paradigm

Banks may save costs and time while simultaneously improving the quality and dependability of the end product by following these six principles. Enabling a better interface layer is a critical lever for ensuring the architecture’s resilience and future preparedness, as well.

Banks, on the other hand, will have to rethink their whole operating model in order to make the most of this new modernization method. Only through changing the “how” of delivery can such a revolution be realized; it cannot be done just via technological advancements. By introducing important enablers to promote new working practices, the six principles outlined here will be more readily adopted. These are a few examples in particular:

• With the right mix of talent, you can achieve engineering excellence. To ensure progress toward a more straightforward and standardized architecture, form smaller teams with better people.
• One that is truly platform-oriented for all teams. Assign each team an API and provide them with all the services.
• An architecture for the public cloud that is cloud-native and automated. Make the deployment pipeline as automated as possible in order to boost efficiency.

Conclusion:

The organization’s dedication to change management and the constant growth of its IT infrastructure is essential to this new style of working. Modern IT design (such as the Oracle Flexcube 14.x) will be possible for banks that can make adjustments to both technology and operational models.