In brief
- The financial services industry has become highly complex with intricate financial instruments, risk management systems, and regulatory scrutiny, making it challenging for a single person to understand all the information flows and technology systems.
- Legacy technology estates in financial institutions create cost, time-to-market, revenue, and operational risk challenges.
- The pandemic temporarily delayed addressing legacy technology issues due to market volatility but organizations must prioritize modernization efforts to stay competitive, considering factors like incremental planning, partnerships, and cloud rearchitecting.
Like all industries, the financial services industry started simply. But today, it's an
incredibly complicated industry. We work with complex financial instruments. We have
sophisticated risk management systems. Significant regulatory and compliance scrutiny is applied
on top of that. And all of this is instrument-specific or, at the very least,
instrument-class-specific.
This means it's now difficult to find a single person in a
financial services institution who can fully understand all of the different information flows
and technology systems that support this very complicated business state.
This complexity is
a problem because every technology has a shelf life. For example, programming languages age and
are replaced by more powerful and efficient languages. System architectures also age. Our
industry has been debating for several years about when and where it's appropriate to replace
older monolithic architectures with more modern microservices.
Today's cutting-edge solution
becomes tomorrow's technology problem and overhead. This isn't just a question of having an IT
wish-list and wanting to play with the latest and greatest technology. This is something which
has a significant impact on cost, time-to-market, revenue and operational risk.
The impact of legacy technology drag
Traditionally, we think about legacy technology estates causing a drag on the
business in terms of cost and time-to-market. All major banks have implemented
cost programs in recent years. However, in the vast majority of cases,
cost-to-income ratios have either remained stagnant or have actually worsened.
Most legacy technology estate programs have failed to achieve the results that
the business expects.
It's important to remember that even with this focus on
cost, there are revenue impacts here as well. Banks that have either already
addressed their legacy technology estate or were launched from the beginning as
digital-native, have a much better ratio of operating expenses to assets under
management. This means that for every dollar of cost they can manage more assets
and, by implication, generate more revenue.
So legacy technology estates are
having a significant negative impact on the ability of financial institutions to
maximize revenue.
How the pandemic gave legacy a temporary reprieve
Why has the industry been so slow in addressing these legacy estates? One reason is that these
projects tend to get shelved during boom times. In such times, the focus shifts to taking
advantage of the current market situation, so the funding and legacy technology problems get
deprioritized.
After initial uncertainty, the COVID-19 pandemic has proved to be a boom time
for the financial services industry. For example, we saw an increase in market volatility which
increased trading revenues as people responded to the COVID impact. According to the
results of our survey at the 2021 RegTech Summit, technology professionals have witnessed a
decrease in funding for legacy remediation during this boom.
So the pandemic has provided a
temporary relief to the industry, but that's now fading fast. Financial services organizations
that have managed to maintain focus on reducing legacy drag on their businesses will be best
positioned to tackle the challenges ahead.
Approaches to the legacy challenge
As we have discussed, legacy technology estates are typically thought of in terms of cost and
time-to-market, causing organizations to take a set of typical approaches. These include moving
platform operations offshore and applying DevOps and CI/CD to existing legacy technology estates
wherever possible.
But we can't think of legacy technology only as a cost and time-to-market
problem. It's also a revenue issue and an operational risk. Therefore, we need consolidated
approaches that simplify the entire stack.
Success factors for legacy transition
We need to transition the workforce to a new way of working. There are three success factors for
getting this right and organizations that focus on these factors tend to be more successful in
modernizing and digitizing their legacy estates.
- Incremental planning
Incremental planning allows change to be accelerated or decelerated, based on market pressures and internal prioritizations. - Partners and platforms
This is crucial to help select the desired end-state and ensure you have the right teams in place to help you get there. - Rearchitecting for cloud
This means not just migrating legacy systems to the cloud, but considering designs that allow delivery of the full cloud benefits.
When organizations follow these three principles, they maximize the benefits of removing legacy estates.
Take the next step to address your legacy technology
To find out more about transitioning from your legacy technology estate to a scalable cloud-ready architecture, get in touch with us to continue the discussion.
Nathan Snyder
Nathan leads Technology Offerings globally for Adaptix Solutions. The department is responsible for delivering technology expertise to our clients across data, architecture, UX, Agile and other domains. Nathan has a background in leading technology programs and departments in sell-side financial institutions.
