Modernizing legacy systems in banking is a bit like renovating your kitchen. Depending on the current state, you could either add a fresh coat of paint, replace outdated appliances, or do a complete overhaul.
Whatever the scale, legacy system modernization is a complex project that requires careful planning and strategic thinking. Where should you begin? What technologies will you need? And most importantly, do you need that modernization in the first place?
It’s not just about following the trend – modernization should address real needs and align with your specific opportunities and limitations on the tech side. Remember, there are always dependencies to consider, and navigating them can be quite challenging.
I am Anastasiia Kazakova, a Project Manager and Associate Delivery Manager at Uptech. In this post, I will explain all the nuances of the modernization of banking legacy systems – from what “being legacy” means to tips on how to make the magic happen.
Keep reading!
What Is a Legacy Banking Core System?
The roots of banking automation go back to the 1960s when cash machines revolutionized how customers accessed money. Fast forward a few decades, and you’ll find something surprising – many banks are still running on legacy core systems designed in the 1980s and 1990s. These systems, while reliable and fast at processing transactions, have become inflexible and resistant to change.
Legacy systems were built as all-encompassing technological monoliths, hardwired to handle everything a bank needs. They may still get the job done, but they come with some challenges that are hard to ignore.
Main characteristics of banking legacy systems
Legacy banking systems were built for stability rather than agility. While they remain reliable, they struggle to adapt to modern demands. Most rely on outdated technologies and monolithic architecture. That means even minor changes require extensive modifications, increasing costs and delays.
Many still run on mainframes, requiring constant updates, manual backups, and high operational expenses. Limited integration capabilities make it difficult to connect with modern APIs, third-party tools, and real-time data systems. Over time, continuous patching leads to code rot, where years of quick fixes create inefficiencies and make the system harder to maintain.
Every temporary fix applied instead of a proper upgrade adds technical debt, making the system harder and more expensive to maintain. At some point, this debt becomes unsustainable, forcing banks to consider modernization.
So, while legacy banking core systems were once sufficient for the needs of the past, now they are a major obstacle in meeting the speed, flexibility, and personalization demands of modern customers.
What do modern banking systems look like?
The modern banking system is no longer just a tool for transactions; it’s a flawless, always-on experience built for customers who expect speed, efficiency, and personalization. A whole new generation of users has grown up in a world where everything is ubiquitous, accessible, and immediate. What once took days or weeks must now happen in minutes – or even seconds – to keep these modern customers satisfied.
So, what sets next-gen banking systems apart from legacy ones? Here are the key things that define modern banking infrastructure.
Cloud-native architecture
Modern banking systems are mainly built on cloud-native technologies that allow banks to scale horizontally, quickly deploy updates, and ensure resilience. Unlike legacy systems tied to on-premise servers, cloud-native platforms enable agility, flexibility, and cost-effectiveness.
Real-time processing
Gone are the days of batch processing. Next-gen systems operate in real-time, whether its processing transactions, updating account balances, or responding to customer queries.
AI-powered capabilities
Modern systems heavily rely on advanced technologies like artificial intelligence for a range of functions.
- Fraud detection. With AI, banks can identify suspicious activities instantly to prevent losses.
- Predictive analytics. Banks can anticipate customer needs more accurately, offer tailored financial products, and improve decision-making with predictive analytics models in place.
- Chatbots and virtual assistants. Customer queries can be resolved instantly, 24/7, thanks to AI chatbots that can be developed for the specific needs of a particular business.
At the same time, it’s super important to choose the right AI model for a particular modernization initiative. AI solutions must align with fintech compliance standards to protect sensitive financial data and ensure regulatory adherence. That’s why you are required to work with AI specialists to select models that meet security, privacy, and performance requirements while maintaining trust and compliance.
APIs and open banking
APIs (Application Programming Interfaces) are a cornerstone of modern software systems. The banking and insurance domain is no exception. APIs provide integrations with third-party services so that customers can access a broader ecosystem of financial tools and services. Open banking further enhances this by enabling data sharing between institutions with customer consent.
Customer-centric design
Modern systems feature intuitive, mobile-first banking app designs that make banking easy and accessible for tech-savvy users. They often include features like
- personalized dashboards
- smart notifications
- goal-setting tools
These and other functionalities empower users to manage their finances better.
Highly scalable and flexible infrastructure
Next-gen systems are built to handle dynamic demand, whether it’s accommodating a surge in transactions during peak periods or expanding services as the user base grows. Scalability means that a system shows consistent performance without costly downtime.
Built-in regulatory compliance
Modern platforms integrate tools for compliance with ever-evolving regulations like GDPR, PSD2, and AML laws. Automation streamlines reporting, auditing, and adherence to local and international standards.
Enhanced security frameworks
Fintech cybersecurity is central to modern banking systems. Features like multi-factor authentication, end-to-end encryption, and real-time threat monitoring protect both the bank and its customers.
Frankly, this list isn’t exhaustive; there are many more things that next-gen banking systems bring to the table than their legacy opponents. Yet, as said above, you don’t need to modernize legacy systems just for the sake of modernizing.
Things to Consider Before Modernizing Legacy Banking Systems
Legacy systems have been the backbone of banking for decades, and it’s easy to see why. They’re reliable, heavily invested in, and familiar. But let’s face it – they’re also aging. It’s not easy to make a decision whether to modernize your legacy banking system or not. It’s expensive, risky, and time-consuming. Yet, sticking with outdated tech has its own dangers, from rising maintenance costs to falling behind competitors.
Modernization isn’t just a checkbox on a to-do list. It’s a decision that will impact your operations, your team, and your customers.
So, let’s break down the pros and cons of modernizing legacy systems in banking before you actually do it.
Pros of legacy banking system modernization
Better performance and efficiency
Modern systems are built for speed and reliability. If we take real-time processing, it means no waiting hours for transactions to clear – an essential upgrade for customers who expect everything to work instantly.
Lower maintenance costs over time
Modernization can cost anywhere from $500,000 to a few million dollars upfront. At the same time, it saves money in the long run. Legacy systems require constant patches and updates, not to mention the high cost of maintaining mainframes and hiring specialists for outdated technologies like COBOL.
Stronger security
Cybersecurity threats are evolving, and legacy systems just aren’t built to handle them. For example, Equifax, one of the largest US credit reporting agencies assessing the financial health of millions, suffered a 2017 breach that exposed the data of 143 million people due to outdated systems – a failure that could have been avoided with modernization.
Modern platforms include advanced features like encryption, fraud detection, and compliance with strict regulations. In Europe, banks follow PSD2 (Revised Payment Services Directive) to enhance payment security and authentication.
In the United States, regulations such as PCI-DSS (Payment Card Industry Data Security Standard) protect card transactions, GLBA (Gramm-Leach-Bliley Act) enforces customer data privacy, and AML/KYC (Anti-Money Laundering and Know Your Customer) requirements help prevent financial crimes.
Room to grow
Cloud-based systems make it easier to scale your operations. Whether you’re launching new services or expanding globally, modern platforms adapt without needing massive overhauls.
Access to innovation
Upgraded systems work seamlessly with AI tools, APIs, and data analytics. Think predictive analytics that helps you offer customers the right products at the right time or AI-driven fraud prevention that flags suspicious activities.
Cons of legacy banking system modernization
High upfront costs
There’s no sugarcoating it – modernization is expensive. Costs can range widely, depending on the scale of the project, but for large institutions, they often hit seven figures. For example, BBVA Compass, the U.S. arm of BBVA, spent over €2.4 billion on a decade-long digital transformation to lead in legacy system modernization.
Migration headaches
It can be really tricky to move off a legacy system. The process to transfer vast amounts of sensitive, often poorly formatted data takes considerable time. Risks include data loss, corruption, mapping errors, and inconsistencies, all of which can disrupt operations.
Downtime during the switch remains a possibility, which affects customer service and may lead to financial losses. Teams must keep data accurate and intact while meeting compliance requirements, adding another layer of complexity to the process.
Cultural resistance
Employees who’ve spent years on a familiar system may resist change. One of your tasks will be to train and support your team to help them adjust to new workflows. A well-designed user experience (UX) can help you ease this transition. A familiar interface, intuitive navigation, and clear process flows reduce frustration and make the new system easier to adopt.
Time to see results
Modernization is a long game. While it offers cost savings and efficiency down the road, you might not see immediate returns on your investment. Be ready for that.
Vendor dependency
Proprietary solutions can lock you into specific vendors, which may limit your flexibility in the future. Carefully evaluate open-source or modular options if you want more control.
Why modernization is still a must in the long run
Modernizing legacy systems is a strategic decision, not just a trend to follow. It must align with your institution’s goals and priorities. That said, the longer modernization is delayed, the more it can cost in terms of operational inefficiencies, higher maintenance expenses, and lost opportunities.
Legacy systems were built to last, but not forever. Customers want faster service, better experiences, and more innovative solutions. Competitors are already moving toward technologies that deliver on those expectations. The longer you wait, the harder it gets to keep up.
The decision to modernize is yours – but it’s worth considering how the cost of waiting could impact your ability to stay competitive.
3 Key Approaches to the Modernization of Legacy Core Banking Systems
Modernizing legacy core banking systems is not a one-size-fits-all process. The right approach depends on the current state of your systems, your business goals, and your available resources.
Some banks may need a complete overhaul, while others can achieve their objectives through incremental updates or cloud migration. Below, we’ll explore the main strategies for modernization, helping you decide the best path forward for your institution.
Approach 1. Wrapping an existing legacy system with a next-gen shell
One approach to modernizing a legacy core banking system is wrapping it with a next-generation layer, often called a "parallel shell" or "building on top." This method integrates a modern core platform with the existing legacy system through API connections, allowing the new layer to interact seamlessly with the older infrastructure.
This approach enables banks to expand their product offerings, connect with external vendors, and introduce new capabilities without disrupting the core functionality or data integrity of the legacy system. The modern layer handles new processes, while the legacy system remains the foundation for core transactions and data management.
The wrapping approach links a next-generation layer to the legacy core system through APIs. These APIs create a direct connection between the systems for instant data exchange. The modern layer acts as the interface for new capabilities, while the legacy core processes transactions and manages backend operations.
When a transaction begins in the modern layer, the legacy system handles it directly, maintaining operational stability. This setup keeps the existing system functional. At the same time, it allows banks to launch new products, services, and payment options. For instance, a bank could integrate a fraud detection tool powered by machine learning or a real-time payment gateway to meet customer expectations.
When to choose the wrapping approach
Wrapping is most suitable for systems that already have – or can reasonably support – API connectivity. Banks with moderately modernized legacy systems, or those able to invest in middleware or custom API solutions, can benefit from this approach.
For legacy systems that lack the necessary integration capabilities, other modernization strategies, such as incremental changes or full system reengineering, may be more effective
Approach 2. Small incremental changes and improvements
For banks that cannot commit to a complete system replacement, small targeted updates provide a practical way to modernize. These updates improve functionality, reduce risks, and prepare the system for future requirements. Key options include code refactoring and/or replacing individual components of the system.
Code refactoring
Refactoring is when you rewrite or, if possible, restructure parts of the system’s code to improve quality, performance, and maintainability. Many legacy systems rely on outdated code that creates inefficiencies, slows down operations, and drives up maintenance costs.
For example, a team may remove redundant code, optimize algorithms to process transactions more quickly, or replace hard-coded dependencies with flexible configurations. These improvements may make it easier to update the system and introduce new features. However, the process requires highly skilled developers familiar with the older technologies we talked about earlier, which can pose a challenge for some institutions.
Component-based replacement
Another option is to replace specific components, such as the lending or deposit modules, which allows banks to modernize step by step. This approach is less risky than full replacement and focuses on upgrading one function at a time.
For example, you might upgrade the lending module first, as it typically involves fewer customer-facing interactions compared to the deposit system. After extensive testing, you can then proceed to upgrade other components, such as deposits or payment processing. Running old and new components at the same time provides better stability during the transition.
When to choose incremental modernization
This approach is ideal for banks that:
- Manage complex legacy systems where a full replacement is not feasible.
- Seek to reduce risks and disruptions during modernization.
- Need immediate improvements while preparing for larger changes in the future.
Approach 3. Banking core system reengineering
Core system reengineering provides banks with a transformative solution for modernizing outdated systems. This approach replaces monolithic systems with modular components or entirely new platforms. While it requires significant resources, it delivers unmatched flexibility, scalability, and adaptability for future needs.
Microservices architecture
A microservices architecture breaks down the core system into independent modules, called, well, microservices. Each module handles a specific function, such as payments or account management, and operates separately. This structure allows banks to update or scale specific areas without affecting the entire system.
APIs connect these modules to ensure smooth communication and reduce interdependencies. For instance, banks can scale the payment module during peak transaction periods without impacting other functions. This modular setup prepares the system to respond quickly to market changes and supports the introduction of new features.
Adopting microservices requires a redesign of the existing system. Banks need expert teams and detailed planning to execute the transition safely. While this process demands time and effort, it creates a more agile and resilient system capable of meeting modern demands.
Replacement of the banking core system
The most radical way is to replace an entire system with a modern platform. Here, you first choose a solution that aligns with your long-term goals. Migration happens step by step. It’s important to focus first on areas like lending before you move to customer-facing services such as deposits.
Old and new systems often operate simultaneously during this transition. The parallel setup keeps operations stable and gives teams the chance to test the new system in detail. Early bug fixes help avoid serious disruptions.
A complete replacement removes the limits of legacy technology. It makes workflows simpler, adds advanced tools like AI and APIs for a network of useful integrations, and prepares the bank for growth and innovation. While it requires a large upfront investment, the benefits in the long term make it worthwhile.
When to choose core system reengineering
This approach is best for banks that:
- Struggle with legacy systems that cannot support modern business needs.
- Have the financial and technical resources to handle a large-scale transformation.
- Aim to achieve long-term flexibility, innovation, and scalability.
Reengineering a core banking system is a bold step, but for many institutions, it is the only way to align their operations with the demands of a rapidly evolving financial landscape.
Additional approach: Migration to the cloud
Modernizing core systems often requires banks to move processes to the cloud. This shift transfers operations from hardware or mainframes in physical locations to servers hosted by third-party providers or core vendors. By using the cloud, banks reduce hardware maintenance, access data more quickly, simplify updates, achieve scalability, and connect to other systems through APIs.
This approach complements the three core modernization strategies. For example, a bank that replaces its entire system can adopt a cloud-based core platform. Banks upgrading specific components can shift those parts to the cloud. Even banks wrapping their legacy systems can add cloud-based services to improve functionality and performance.
Leading cloud providers, such as AWS, Microsoft Azure, and Google Cloud, offer built-in security compliance with industry standards to support fintech and healthcare projects. These platforms provide security frameworks that help reduce some compliance-related expenses. However, maintaining full regulatory compliance remains the responsibility of the bank, as security measures must be properly implemented within applications and workflows.
Although many banks already use the cloud, adoption of core systems remains slow. A report by Accenture shows that over 90 percent of retail banks worldwide use the cloud, but few rely on it for critical core banking functions.
This hesitation stems from several concerns, such as data security risks, lack of transparency, and third-party risks.
Despite these challenges, some banks have moved their core systems to the cloud with notable success. Let’s take Seattle Bank, for example. In 2020, this bank adopted a cloud-based platform to integrate with fintech partners and offer Banking-as-a-Service (BaaS). The platform allowed the bank to launch the Paycheck Protection Program soon after the CARES Act was signed, which shows the flexibility of cloud systems.
When to choose cloud migration
If you are among those banking businesses that are looking to modernize and scale, you can definitely explore cloud migration as a viable option. This approach works alongside other modernization strategies and prepares institutions for long-term growth. Although concerns about security and vendor risks are valid, strong contracts and thorough evaluations can address these issues effectively.
Tips on How to Modernize a Legacy System in Banking
Modernizing a legacy system in investment banking requires a clear plan and practical steps to avoid risks and ensure meaningful results. Here are a few recommendations that may come in handy.
Start small
First and foremost, don't replace the entire system at once, as this increases risks and costs. Instead, it's always better to start small to test the waters. Focus on a single problem, such as slow transaction speeds or outdated reporting tools. Resolve one issue at a time, test the changes, and apply them gradually across the system.
For instance, improved accuracy of financial reporting or sped-up trade execution can deliver quick wins and pave the way for more complex upgrades.
Consider event-driven architecture
Legacy systems mainly process data in batches with delays and inefficiencies. Event-driven architecture addresses these problems as it processes data as events in real-time (or near real-time). Here’s how.
Instead of processing data in batches at scheduled intervals, event-driven architecture (EDA) processes data as events happen. In this setup, one application creates or "publishes" an event, which then triggers actions in other applications that subscribe to those events.
These subscribing applications do not depend on the publishing application or even need to know it exists. A predefined contract between the publisher and subscribers ensures smooth communication and allows each system to function independently while staying connected.
Opt for AI integrations
Artificial intelligence allows your business to solve problems and deliver better services. AI can detect fraud by analyzing transaction patterns, predict market trends with advanced predictive analytics models, and provide personalized financial advice tailored to individual client needs thanks to custom recommendation systems.
What’s more, AI helps automate repetitive tasks, such as client inquiries or account reviews, and frees advisors to focus on more complex issues. As an option, you can first apply AI to specific areas, such as fraud detection, and then expand its use over time.
But we’d like to say it one more time – since the choice of an AI model is an incredibly important step, it must be discussed and agreed upon with AI specialists first. In this way, you will ensure data protection in accordance with fintech compliance requirements.
Secure API integrations
APIs are inevitable when it comes to connecting legacy systems with modern platforms and external services. Poorly managed APIs, however, can expose sensitive data and increase risks.
That’s why it’s important to protect APIs. For this, you should use role-based access controls, perform regular security audits, and follow strict data governance rules. For example, API traffic encryption and using tokens to authenticate users keep the system safer from breaches.
Use Agile and DevOps methodologies
Traditional development methods often lead to delays and misaligned priorities. Agile, on the other hand, breaks projects into smaller, manageable phases. As such, teams can deliver improvements faster and more efficiently.
At Uptech, we always follow Agile and DevOps methodologies to ensure projects stay on track and deliver high-quality results. For example, Agile allows us to prioritize updates to specific system features, while DevOps ensures these updates are thoroughly tested and deployed without disruptions.
Make security and antifraud improvements
All banking systems store highly sensitive information, such as client portfolios, personal data, and financial transactions. Needless to say that it’s super important to keep this data protected to maintain trust and meet regulatory requirements.
Key security measures include but are not limited to the following ones:
- Data encryption to prevent unauthorized access.
- Multi-factor authentication to secure accounts.
- Monitoring all transactions to identify and block suspicious activities.
All financial institutions must comply with regulations like GDPR, PCI DSS, and SOX, which require strict data handling protocols and transparency. A strong focus on security helps reduce risks and assures clients of the system’s reliability.
Add open banking to your legacy system modernization strategy
Open banking is a system that allows banks, fintech companies, and other authorized third-party providers to securely share financial data using APIs. It gives customers more control over their data and enables them to access innovative financial services from multiple providers.
For example, with open banking, customers can connect their bank accounts to budgeting apps, payment platforms, or investment tools.
In simpler words, open banking allows you to adopt tools like real-time payments or advanced analytics without the need to replace the core systems. You can also share data with third-party providers to deliver personalized financial services.
At Uptech, we help banks adopt open banking securely and efficiently. For example, we partnered with a US company to implement open APIs, guiding the process step by step. With our expertise, your bank can successfully unlock the potential of open banking.
How Uptech Can Help You With Legacy Banking System Modernization
And that’s not all. This article focuses on modernizing core banking systems, but another approach that has gained traction is Banking as a Service (BaaS). Many fintech companies use BaaS to launch financial products without the need to build a banking app from scratch. This method speeds up development, lowers costs, and provides access to banking services through APIs.
BaaS makes it easier to introduce digital banking, lending, and payment solutions. It also simplifies regulatory compliance since licensed banking partners handle most of the requirements. At the same time, it’s important to understand what a BaaS provider offers so that the final product meets business needs.
At Uptech, we have experience in both BaaS-based solutions and custom banking platforms. Here are some examples of what we’ve done:
Aspiration. Aspiration is a financial firm focused on ethical banking. They partnered with Uptech to create fast and secure iOS and Android apps. We’ve been working with Aspiration since 2016 to ensure their apps reflect their mission of trust and giving back.
Cardless. Cardless is a fintech company that helps brands create custom credit cards for their superfans. Uptech built a native Android app for them in just three months. We also redesigned the app’s architecture, improved its logic, and now provide full maintenance for both Android and iOS.
Green Investment App. This platform allows green investors to support projects, manage their portfolios, and measure their environmental impact. We helped develop a green investment app to make all of these things easier and more accessible.
Neobank Concept. We also created a concept for a neobank app by researching the legal, technical, and business requirements. This experience gave us deep knowledge of neobank development, which we now share with our clients.
Whether you need to modernize a legacy banking system, integrate BaaS into a fintech product, or build a new financial solution, Uptech can help. Let us guide you every step of the way.
FAQs
What are legacy core banking systems?
Legacy core banking systems are monolithic platforms built decades ago using outdated technologies like COBOL. They handle essential banking operations such as transactions, account management, and record-keeping but lack the flexibility and scalability of modern systems.
How has technology improved banking?
Technology has enabled real-time transactions, improved customer experiences, strengthened security, and introduced advanced tools like AI for fraud detection and predictive analytics.
What is replacing the core banking platform?
Cloud-based, modular, and API-driven platforms are replacing legacy systems. These modern solutions offer scalability, flexibility, and easier integration with advanced technologies.
What is the next-generation banking core?
Next-generation banking core refers to modern, cloud-native platforms that support real-time processing, horizontal scalability, and integration with technologies like AI and APIs, catering to the demands of today’s customers.
What are some reasons why some banks still use outdated systems?
Banks often stick to outdated systems due to high modernization costs, migration complexities, operational risks, and compliance challenges. These systems also represent a significant long-term investment, making the switch difficult.
How can a bank start modernizing its core system?
Banks should begin with an assessment of their current system, identifying bottlenecks, security risks, and integration challenges. Consulting with fintech experts can help define the right modernization approach—whether upgrading specific components, adopting cloud-based solutions, or replacing the core system entirely.
Who should banks contact for modernization?
A successful modernization project requires collaboration with fintech consultants, cloud providers, and technology partners who understand both banking regulations and technical requirements. At Uptech, we know all the nuances of modernization and ways to make it as smooth as possible.
How long does banking system modernization take?
The timeline depends on the approach. Incremental upgrades (such as integrating new APIs or AI tools) can take a few months, while a full core replacement may span several years. A phased approach helps reduce risks and maintain continuity.