The banking and finance sector is undergoing a significant transformation as digital technologies and new business models dramatically alter the way they compete for customers. A key challenge for banks is the legacy infrastructure that underpins much of their operations.
Legacy systems include core banking systems, data management systems, and payment systems, which are often arduous to change, thus making it difficult for banks to modernize their operations and take full advantage of new technologies. Many systems were built for a different era of banking and were not designed to accommodate the rapid changes taking place in the industry today.
In a recent whitepaper, Diebold Nixdorf looks in detail at how legacy infrastructure is holding banks back and at how modernizing this infrastructure can improve customer service and increase margins.
Modernizing IT Infrastructure
Legacy infrastructure systems work well but aren’t suited to a rapidly changing landscape. Because many banks still use the underlying code to do transactions that was employed in the 1980s, these systems often require specialized expertise and dedicated resources to ensure they’re running. According to the whitepaper, “the generation of IT professionals who developed these systems and who hold the expertise in COBOL and other antiquated code have now reached retirement age, leaving no bench strength. And the ‘Great Resignation’ has only deepened the cracks.”
Innovative banks are addressing their legacy infrastructure in several ways.
Take cloud-based technologies, for example, which provide greater flexibility and scalability than company-maintained data storage. With cloud-based technology, the bank doesn’t have to worry about having the right amount of in-house data storage and computing power. If more customers come, the bank can simply add capacity from the cloud rather than buy additional hardware.
Similarly, low-code environments make it easier for people without a background in programming to change aspects of an IT system. Updating legacy systems requires programmers who are familiar with the outdated code used to create the system, and those programmers are a dying (or retiring) breed. Thus, a low-code environment is a permanent fix to that problem.
“A low code environment is a platform that allows users to create and customize applications using visual drag-and-drop interfaces and pre-built templates, rather than writing code from scratch,” the whitepaper notes. “Low code environments can be used to build a wide variety of applications, including web and mobile apps, data analytics dashboards, and more. [In particular] they can be useful for quickly prototyping and building applications and can help organizations speed up the development process by allowing more people to contribute to building and customizing software.”
Cloud-based systems and a low-code environment are essentially an update to existing banking systems and constitute a conservative approach to developing IT. Certain banks are taking a more radical approach and opting to replace their legacy systems altogether with new platforms built on a microservices architecture to support the new services-oriented business models of today.
Microservices architecture breaks down a large application into small, independent services that communicate with each other over a network. Each service is responsible for a specific function and can be developed, deployed, and scaled independently from the others.
With microservices, it’s easy to update and replace individual components of the system without affecting the rest of the application. This contrasts with traditional monolithic architecture, where a change to one part of the system can affect the entire application and deployment of updates difficult.
Microservices can enable banks to develop and deploy new features and services quickly and easily, which can improve customer experience and drive innovation. It also allows for new features to be tested and deployed in a controlled way, reducing the risk of disruption to existing services. But implementing a microservices architecture requires effectively starting from the ground up. Banks taking this approach would need to throw out a system that they already know works and start from scratch.
Using cloud-based data storage, a low-code environment, and microservices architecture is helpful for banks as they pivot toward a more services-oriented business model. Traditionally, banking has been seen as a product-based industry, with banks offering specific financial products such as loans, savings accounts, and credit cards to customers. In recent years, banking has evolved into a service industry, where the focus is on providing customers with a range of services to help them manage their financial lives. This is essentially a different business model, and banks are investing in advanced technologies and building platforms to compete in that model.
Advantage of Banks over Fintech
With the tanking of fintech stocks in 2022, it has become clear that banks have significant advantages over the younger upstarts. They already have a customer base and historical transaction data. Furthermore, banks can execute a variety of payments, including debit card transactions, ACH transfers, and checks. Banks don’t rely on payment transaction fees as their sole source of income. All of these aspects give banks an edge over fintechs. With the right technology enabling a flexible payment experience for customers, banks can retain that edge.
However, the advances in technology have been a double-edged sword for banks in terms of customer retention.
“The cradle-to-grave loyalty days are long gone, and minor issues can cut relationships short. Thanks to modern technology, consumers can quickly google alternatives that offer the services you don’t and join in just a few minutes,” according to the whitepaper. “On the other hand, if you give your customer great experiences, you drive stickiness. With a modern system, FIs can tap into real-time data for a 360-degree view of customers, accounts, and transactions. This view enables the extension of hyper-personalized services, which results in consumers doing more transactions with you, increasing your revenue and attracting new customers.”
Legacy infrastructure is a major challenge for banks as they look to fully embrace the digital and services-oriented architecture transformation needed to excel in the future of payments. These old systems are inflexible, costly, and time-consuming to maintain. To stay competitive, banks will need to make significant investments in modernizing their infrastructure and transitioning to more modern and flexible platforms that can support the new business models and technologies.
