Financial institutions have long relied on legacy technology to manage their operations. As technology advances at a breakneck pace and banking customers have high expectations, the financial services industry is finding it increasingly difficult to keep up.
However, there is always a risk with these aging systems that pose many challenges for financial institutions. Outdated legacy systems and technologies can quickly become incompatible with new hardware and software solutions. That's why digital transformation is so critical for financial services, institutions, and banks.
Overview of legacy technology in the financial industry
Legacy technology in the financial industry refers to any hardware and software solutions that are outdated, incompatible with new technologies, or no longer fit for purpose. These systems, including mainframe computers, databases, and software programs, have often been used for years, and may even have become an integral part of operations.
Legacy systems can also be costly to maintain due to the need for custom hardware and support services. In fact, McKinsey reports that just five to ten cents of every dollar spent on technology will provide additional business value. The remaining majority of each dollar goes to managing aging infrastructure and implementing mandatory changes.
Furthermore, legacy systems tend to lack scalability, making them ill-equipped for the fast-paced changes seen in the industry.
Risks associated with the use of legacy technology
Understanding the challenges associated with legacy technology is essential for financial institutions looking to stay competitive in today’s digital landscape. The use of legacy technology can pose a number of risks to financial institutions. These include security, compliance risks, and customer dissatisfaction.
Outdated systems pose security risks
The security risks posed by legacy systems can be especially dangerous. Outdated technologies may not have the same level of support or data protection provided by newer hardware and software solutions.
When old technology goes out of service, it makes it easier for cyber threats and criminals to gain access. This can pose a significant risk to financial services organizations, as data breaches can cause irreparable harm to your bottom line.
In fact, as IBM’s 2022 report found, the average cost of a data breach in the U.S. is a staggering $9.44 million, and the global average is $4.35 million. Between the actual cost and the damage to trust with customers, financial institutions face a steep hill to climb if they’re a victim of cybercrime.
Compliance challenges in the banking industry
Banking is one of the most heavily regulated industries. Legacy systems may not meet current regulatory compliance standards, putting financial institutions and fintech companies at risk of penalties or fines if they fail to adhere to these regulations. Compliance is an integral part of any financial institution’s operations, and it is essential that they are able to stay up-to-date with any new requirements.
Customer expectations & dissatisfaction
Outdated technology may not be able to keep up with customer demands in terms of speed and agility, which can lead to dissatisfied customers for your bank or credit union. In today's digital era, mobile banking is key for financial providers, alongside innovative solutions for payment processing. This is especially true for Gen Z.
A poor customer experience can result in lower customer engagement and retention rates, which can have a direct impact on the bottom line. Additionally, outdated legacy tech may not allow for innovative new service offerings to reach their full potential.
Challenges for financial institutions using legacy technology
There are many banking industry challenges associated with using outdated financial technology. Having an understanding of the challenges posed by these old business models is essential for financial institutions seeking to remain competitive in our ever-evolving digital landscape.
Outdated tech slows you down
Legacy technology, which includes outdated software and hardware, is still being used by many financial institutions today. Legacy systems are typically more difficult to maintain, as they may not be compatible with the latest software or hardware solutions available in the market.
As a result, upgrading these systems can take significantly longer than deploying new technologies, resulting in higher associated costs.
Lack of compatibility with your tech stack
Finally, the lack of compatibility between legacy systems and modern technologies can decrease efficiency and productivity. As financial institutions are often dealing with large amounts of data, it's essential that they have access to quick and reliable technology solutions. Without them, transactions may be delayed or disrupted, negatively impacting customer service in the process.
Cost of upgrading to modern solutions
The cost associated with upgrading legacy technology can be a major deterrent for financial institutions. As these systems are often more complex than modern solutions, the process of transitioning to newer platforms can be expensive and time-consuming.
This is especially true if your existing tech stack consists of multiple working pieces that communicate with each other, rather than having an all-in-one solution. Plus, investing in new technologies may require additional training for staff members, which can add to the already high costs involved.
However, it can be even costlier to have to handle a massive security breach or to continue running on outdated, inefficient systems and digital channels.
Benefits for financial institutions when upgrading to new systems
In order to remain competitive, financial institutions must take steps to modernize their legacy technology and ensure they have a robust security infrastructure in place. Investing in the latest hardware and software solutions can help minimize security breaches while also allowing traditional banks to better serve and retain customers.
Additionally, financial institutions should look for ways to streamline processes such as authentication, transaction processing, and customer service in order to reduce costly delays. Newer technology allows for new operational efficiencies, like virtual assistance and artificial intelligence, which can aid in customer interaction via digital experiences.
By taking advantage of these solutions, financial institutions can remain competitive in an ever-evolving digital landscape.
Strategies for mitigating risks associated with legacy technology
A modernized system can reduce operational costs while providing improved security with features such as encryption and two-factor authentication protocols. It can also offer scalability and support for new technologies, allowing financial institutions to remain agile in adopting new processes. Investing in a modernized system can help ensure regulatory compliance and simplify the process of meeting consumer demands.
The E6 Difference
E6 is a global provider of enterprise-grade payment technology and ledger management infrastructure for banks that need to keep pace with disruptors and evolving consumer preferences. Tritium®, our PCI-compliant core platform, is 100% cloud-based and accelerates digital transformation by removing the limitations of legacy technology and enabling our customers to drive the future of payments.
We've been working with banks for years so we understand your challenges and how to solve them. Contact us today to see how we can help your business evolve.
