What Are Legacy Systems in Finance?
Banks, insurance firms, and financial services companies built their first computer systems many years ago. These original IT infrastructures helped manage vital operations: customer data, transactions, risk analysis, compliance reporting, and other core functions.
Over time, companies improved small parts of these old systems when needed. But the central underlying systems, called legacy systems, stayed the same because they still worked fine. Examples of legacy systems are mainframe computers, older databases, and custom software coded long ago.
These legacy systems focused on batch processing tasks and storing data. They were not built for today’s world of real-time mobile applications, high-speed digital transactions, and constant connectivity that customers expect.
Why Legacy Systems Cause Problems Today
While legacy systems served financial companies well previously, now they constrain progress in today’s fast digital economy. Main problems include:
Inflexibility and Slow Changes
Making coding changes to legacy systems takes many months of tedious work. This makes it hard for companies to quickly add new features or integrate updated technologies. Launching a mobile banking application or digital analytics tool off old legacy systems can take over a year.
Security Gaps and Data Risks
Many legacy systems have latent security risks from their age or fragmented upgrades over the decades. Outdated infrastructure also lacks modern encryptions, fraud monitoring defenses, and cyber attack prevention tools that are crucial today. This leads to data breaches and system outages.
Scaling Difficulties
Traffic spikes from mobile/web apps can overwhelm legacy systems built for batch overnight processing. The huge data volumes and speed needed exceeds legacy system capacities. This leads to denied customer transactions and disrupted operations.
Soaring IT Costs and Inefficiency
Maintaining intricate legacy systems requires scarce technical skills. Typically, only older IT staff knows legacy coding languages and arcane systems. Operating costs per transaction off legacy keeps increasing too. This drains IT budgets quickly.
How Cloud Modernization Solves These Technology Problems
Transitioning financial services legacy systems to agile cloud computing platforms mitigates the pain points above. Top benefits include:
Built-In Security
Cloud platforms leverage modern cybersecurity tools like role-based access, encryption, network security, and advanced threat detection. This better safeguards data from risks legacy systems face.
Flexibility and Speed
Cloud computing makes it easy to scale computing power up or down as needed, spinning up resources to manage unexpected traffic spikes. New tools and apps integrate with cloud platforms quickly through standard APIs versus legacy coding projects.
Innovation Culture
Cloud platforms empower developer productivity and collaboration. IT teams can shift focus from legacy system maintenance to building new apps and features that dramatically improve customer and employee experiences.
Cost Savings
Cloud eliminates expensive legacy hardware costs by leveraging shared infrastructure that is cheaper. Automation and AI optimize cloud costs. IT staff time and manual resources drop since cloud needs less human upkeep.
Hybrid Integration Approach to Modernization
Ripping out and replacing legacy systems altogether risks operational instability. But a hybrid integration method leaves legacy systems intact while leveraging cloud alongside via APIs:
Connectivity Layer
An API and integration layer sits in between new cloud apps and legacy systems. This acts as a bridge, providing added security, connectivity, and data management.
Microservices Modularity
Monolithic legacy systems can stay completely intact. But new functions get built as modular microservices on cloud platforms. This prevents sprawling legacy system dependencies and custom coding projects.
Externalizing Capabilities
Surface legacy data and functionalities as APIs for reuse. This lets modern digital frontends tap into mainframes for transaction processing while leveraging cloud speed and interfaces.
Modernization Done Right Mitigates Risks
Strategically moving core financial operations onto new platforms carries short-term risk. But smart modernization planning ensures continuity:
- Audit integrations, data flows, regulations, and risks beforehand
- Set a multi-year roadmap aligning modernization to business goals
- Initially pilot integration approaches before full rollout
- Provide ample training and communication to staff across transition
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Frequently Asked Questions
Q. Why are financial services still relying on such outdated technology?
A. These legacy systems process essential, high-value transactions. So companies avoided changes to these fragile but core systems to minimize disruption risks. But legacy systems now constrain progress.
Q. Don’t rip-and-replace projects carry too much risk?
A. Yes, completely replacing entire legacy systems carries massive risk. That is why low-risk hybrid integration is recommended. This surfaces legacy capabilities as APIs to reuse in modern cloud platforms for new innovations.
Q. How long does a legacy modernization effort take in financial services?
A. Properly planned modernization efforts span 2-4 years for large institutions. This allows careful transitioning of essential functions to cloud while optimizing costs and risks. Impacts must get managed across customers, counterparties, regulators and internal stakeholders over time.
