Article: Legacy Modernization for Financial Services &…

Legacy Modernization for Financial Services & Banks: The Way to the Digital Future

The most important thing in the short term: In many banks, up to 80% of the IT budget flows into the maintenance of legacy systems ([Source: Red Hat](Redhat (redhat.com, external source) services/how-to-accelerate-modernizing-legacy-banking)). Modernization via microservices, cloud infrastructure and the Strangler Pattern allows step-by-step detachment without operating interruption – with the result: faster time-to-market, open-banking capability and real-time fraud detection.

The financial sector is facing a profound change.

Driven by new digital competitors (FinTechs), changing customer expectations and a steadily more complex regulatory system, banks and financial service providers need to refocus their business models and, above all, their technological base.

At the heart of this digital transformation is the urgent need to modernize the often decades-old Legacy systems.

These old systems, which in many cases are still based on mainframes and programming languages such as COBOL, are stable, but they have become innovation brake.

This complete blog post highlights why the Legacy moderation for banks is not only an option but a survival necessity.

We analyse the key challenges, the enormous advantages of a modern IT architecture, and present concrete applications as well as proven strategies for successful IT-modernisation in finance.

Why Legacy Systems Be Loaded in the Financial Industry

Short: Executive answer: The financial sector is facing a profound change.

Executive answer: The financial sector is facing a profound change.

For Legacy Modernization for Financial Services & Banks: The Way to the…, Legacy Modernisation, Cost Calculator: Legacy Modernisation, Solution: Legacy Reduction sowie Monolith vs. Microservices help you align implementation, scope and budget before you commit.

The stability and reliability of legacy systems that have carried the most critical business processes of banks over decades is indisputable. But this stability comes at a high price.

The disadvantages of outdated IT infrastructures manifest in three critical areas: cost, agility and security.

## High operating costs and inefficiency

Short: The maintenance and operation of legacy systems are a major part of the IT budget.

The maintenance and operation of legacy systems are a major part of the IT budget. Experts estimate that up to 80% of IT expenditure is spent in many financial institutions alone (Source: Red Hat).

**The knowledge about the often proprietary and outdated technologies (e.g. COBOL, PL/I) is sown. The few remaining experts are expensive, and young people lack.
Complex maintenance: Every small change or extension in monolithic architecture is extremely expensive, susceptible to errors and requires long test cycles. .* Inefficient scaling: The scaling of mainframe capacities is disproportionately expensive and inflexible compared to modern cloud solutions.

## Lack of agility and innovation brake

Short: Legacy systems cannot compete in a world where customers expect real-time services and personalized offers.

Legacy systems cannot compete in a world where customers expect real-time services and personalized offers. They are the main reason for a slow time-to-market of new products.

Monolithic structure: The rigid monolithic architecture prevents the rapid implementation of new functions.
New digital services such as mobile apps or innovative credit platforms often need to be connected to the old systems via complicated and error-prone interfaces.
Delayed reaction to competition: FinTechs can market new products in weeks thanks to their modern, cloud-native architectures, while established banks need months or years.
Data-Silos: Data are often trapped in different, isolated legacy systems, which makes a holistic customer vision and the use of big data or artificial intelligence (AI).

## Increased security risks and compliance barriers

Short: Contrary to the rural opinion, legacy systems are not per se safer.

Contrary to the rural opinion, legacy systems are not per se safer. They represent a growing risk, in particular with regard to compliance with strict regulatory requirements.

Old security protocols: The security protocols and encryption mechanisms of many old systems are not designed for today's threat landscapes. Patches and updates for critical vulnerabilities are often no longer available.
Regulatory requirements: Rules such as PSD2 (Payment Services Directive 2), DORA (Digital Operational Resilience Act) or BaFin requirements require high transparency, availability and quick adjustment.
The complexity of the legacy systems makes compliance with these requirements an administrative and technical nightmare.

The central advantages of legacymodernization

Short: Legacy Moderation is the key to overcome these challenges and to ensure competitiveness in the long term.

Legacy Moderation is the key to overcome these challenges and to ensure competitiveness in the long term.

The advantages of a transition to a modern, cloud-capable architecture are manifold and have a direct impact on the business outcome.

## Accelerated time-to-market and higher innovative power

Short: By switching to modern architectures, in particular microservices and API gateways, financial institutions regain the necessary agility.

By switching to modern architectures, in particular microservices and API gateways, financial institutions regain the necessary agility. .* Microservices architecture: Monoliths are dismantled into small, independent services.

Each team can develop, test and deploy its service independently. This enables a continuous provision (CI/CD) and shortens the development cycles from months to weeks or even days.

Open Banking and APIs: The provision of standardized APIs (Application Programming Interfaces) is the basis for Open Banking. Banks can thus seamlessly cooperate with FinTechs and third-party providers, create new ecosystems and offer innovative products such as aggregated account information or fast credit decisions.

## Significant cost reduction and efficiency increase

Short: The shift of workloads from expensive mainframes to flexible, cloud-native platforms leads to massive cost savings.

The shift of workloads from expensive mainframes to flexible, cloud-native platforms leads to massive cost savings.

Cloud infrastructure: The use of public, private or hybrid clouds (e.g.
AWS, Azure, Google Cloud) replaces high investment costs (CAPEX) with flexible operating costs (OPEX).
The demand-oriented scaling (Pay-as-you-go) improves resource use.
Automatization: Modern platforms allow complete automation of operation, monitoring and security (DevOps, DevSecOps), which drastically reduces manual effort and error rate.

## Improved customer experience and competitiveness

Short: Modernisation enables the provision of services that meet today's customer expectations.

Modernisation enables the provision of services that meet today's customer expectations.

Real-time services: Transactions, payments and credit decisions can be handled in real time, increasing customer satisfaction.
Omnichannel capability: A modern IT base allows consistent and seamless customer experience across all channels – from branch to mobile app to online portal.
Personalisation: By consolidating data from different sources, banks can offer highly personalized financial products and consultancy services using KI/ML.

## Increased security and regulatory compliance

Short: Modern architectures are safer from scratch and help compliance with regulator technology.

Modern architectures are safer from scratch and help compliance with regulator technology.

Zero-Trust architecture: New systems can be built according to the Zero-Trust principle where no user or system is trusted by default. This minimizes the risk of internal and external threats.
Auditability and transparency: Cloud-native platforms provide complete logging and monitoring functions that significantly simplify the auditability and compliance requirements (e.g. DORA).

Strategic applications of modernization in banks

Short: Legacy Moderation is not a single project, but a strategic transformation that focuses on specific applications to generate maximum business value.

Legacy Moderation is not a single project, but a strategic transformation that focuses on specific applications to generate maximum business value.

## Modernisation of the core banking system

Short: The **Core Banking System is often the most complex but also the most important project.

The **Core Banking System is often the most complex but also the most important project. It concerns central functions such as account management, payment transactions and credit management.

Step resolution: A Big Bang approach is too risky here. Proven methods such as the Strangler Pattern (Strangler Fig Pattern) allow the step-by-step detachment of functions.
New services are developed parallel to the old system and gradually take over the tasks until the legacy system can be "throttled" and switched off.
Modular components: The aim is a modular Core Banking system consisting of independent, interchangeable components. This reduces the dependencies and allows future upgrades without operational interruption.

## API opening for FinTech collaborations (Open Banking)

Short: Compliance with PSD2 has accelerated the need for API opening.

Compliance with PSD2 has accelerated the need for API opening. However, a modern API strategy goes far beyond that.

API management: A solid API management system is required to safely control third-party access, monitor performance and ensure compliance with user policies.
New sources of revenue: By providing high-quality, easy to integrate APIs, banks can unlock new sources of revenue by offering their infrastructure and data as a service (banking as a service).

## Data and analysis platforms

Short: The ability to process and analyze large amounts of heterogeneous data is a decisive competitive factor.

The ability to process and analyze large amounts of heterogeneous data is a decisive competitive factor.

Data Lakes and Data Mesh: Modern cloud platforms enable central data sheets or decentralized data mesh architectures that merge data from legacy and new systems.
KI/ML applications: On this data base, KI and machine learning applications can be implemented, e.g. for precise credit risk assessment, for optimising marketing campaigns or for predicting customer migration.

## Risk management and fraud detection

Short: The modernisation of IT infrastructure enables a significant improvement in risk control.

The modernisation of IT infrastructure enables a significant improvement in risk control.

**Real-time fraud detection:*Old batch processing systems can often detect fraud cases only hours later. Modern, event-driven architectures allow real-time fraud detection and prevention, which minimizes losses and increases safety. . Regulation reporting: The automation of regulatory reporting (e.g. reporting) by modern data pipelines reduces manual effort and error rate.

Successful modernization strategies: The quality of choice

Short: The choice of the right modernization strategy depends on the complexity of the system, the available resources and the desired speed.

The choice of the right modernization strategy depends on the complexity of the system, the available resources and the desired speed. The current "6 R's" of modernization provide a framework for decision-making.

| Strategy | Description | When to apply?

Risk | | :-- | :-- | :-- | :-- | :-- | | | | | | | | | | | | | | | | | | | | | | | | | | | | ** Rehosting (Lift & Shift) | Move the application to a cloud infrastructure without code changes. | Fast migration, low complexity. | Gering, but no use of cloud-native benefits. | ** Replatforming | Move the application to the cloud with minimal adjustments to use cloud functions (e.g.

## The Strangler-Pattern approach: risk mitigation by step-by-step detachment

Short: For the critical Core banking systems, the Strangler Pattern has established itself as the safest and most effective method.

For the critical Core banking systems, the Strangler Pattern has established itself as the safest and most effective method.

Instead of replacing the entire system at once (Big Bang), a facade (Proxy) is switched in front of the legacy system.

New features are developed as modern microservices and integrated into this façade.

Identification: The most critical or most frequently modified functions are identified (e.g. account balance query).

Development: The new function is developed as a microservice in a modern environment (e.g. Kubernetes).

**The proxy converts the traffic for this specific function to the new microservice. All other inquiries continue to go to the legacy system. .4. Repeat: This process is repeated function for function until the legacy system has been completely "restricted" by the new services and can be switched off.

This approach minimizes the risk of interruptions in operation since the old system serves as a fallback solution as long as the new services are not yet fully stable.

Conclusion: Now act for digital resilience

Short: The Legacy Modernization for Financial Services & Banks is a marathon, not a sprint.

The Legacy Modernization for Financial Services & Banks is a marathon, not a sprint. It requires a clear strategy, technological expertise and a deep understanding of the regulatory requirements of the industry.

The cost of non-trade – in the form of lost revenue, increased security risks and the loss of market shares to agile competitors – exceeds investment costs by far.

The future of banking is digital, agile and cloud-native.

Only those who modernize their technological base can meet the requirements of Open Banking, real-time services and AI-based personalization and secure the digital resilience of their company.

## **Call to Action

Short: **You are facing the challenge of modernising your Core Banking system or developing a secure cloud strategy?

**You are facing the challenge of modernising your Core Banking system or developing a secure cloud strategy? * *

The Legacy transformation is complex but can be successfully implemented with the right partner on your side. Groenewold IT Solutions is your competent partner for IT moderation in finance.

We have expertise in modern cloud architectures, microservices and proven migration strategies such as the Strangler Pattern to gradually and risk-minimumize your critical systems into the digital future.

**Contact us today for a non-binding initial consultation and lay the foundation for the agility and security of your IT infrastructure. **

## References

Short: [1] Red Hat. * Accelerated modernisation of legacy banking systems*. URL: Redhat (redhat.com, external source)

[1] Red Hat. * Accelerated modernisation of legacy banking systems*. URL: Redhat (redhat.com, external source)

[2] adesso. Legacy modernization for banks. URL: Adesso (adesso.de, external source)

[3] OpenLegacy. Legacy Banking Systems: Why and how to Modernize. URL: Openlegacy (openlegacy.com, external source)

[4] Groenewold IT Solutions. To modernize legacy systems: a guide. URL: https://www.groenewold-it.solutions/blog/legacy/legacy-systems-modernisation-one-leit Thread

[5] Baringa. Legacy Tech Infrastructure Remains a Challenge for Banks. URL: Baringa (baringa.com, external source)

Further articles

## Interfaces & APIs for other industries

## More IT solutions for energy & supply

You are interested in interfaces & APIs? Learn more on our performance page interfaces & APIs or contact us for non-binding advice.

Frequently Asked Questions (FAQ)

What is this article about: “Legacy Modernization for Financial Services & Banks: The Way to the Digital Future”?

Here we cover Legacy Modernization for Financial Services & Banks: The Way to the Digital Future — focused on architecture, process, and business outcomes.

In short: The financial sector is facing a profound change.

Driven by new digital competitors (FinTechs), changing customer expectations and a steadily more complex regulatory system, banks and financial service providers need their business mode...

Who benefits most from the content described here?

Typical readers are business and IT leaders in Legacy-Modernisierung who want to secure quality, security, and maintainability over the long term.

How does this topic fit into an IT or digital strategy?

In a digital strategy, prioritize stable core processes first, then extensions. See also professional software development and consulting. For multi-system landscapes, IT consulting and architecture helps align vendors and internal teams.

What are sensible next steps if we need support?

If you need support with design, delivery, or modernization: schedule an appointment or outline your project via contact.

References and further reading

Short: The following independent references complement the topics in this article:

The following independent references complement the topics in this article: