Nadish Lad, Global Head of Product and Strategic Business for Volante Technologies, writes for Payment Expert on the dangers of the overreliance on legacy systems.
Lad explores why it takes more than just a ripping and replacing method, focusing on why a clear business strategy for a company to update its legacy system is a fundamental aspect in bolstering its payment processing capabilities.
Modernisation efforts in the financial sector continue to reveal deep-rooted operational challenges. A staggering 90% of financial organisations continue to rely on spreadsheets as their primary operational tool, signalling significant barriers to technological progress.
Beyond spreadsheets, there are a swathe of outdated technologies and systems hampering financial progress. Once reliable in the past, legacy infrastructures are now proving to be costly roadblocks with fragmented data, lack of interoperability, and increasing inefficiencies slowing banks’ responsiveness to evolving customer demands and industry standards.
Many institutions are actively investing in modernisation – spending on outdated payment systems is expected to reach $57.1bn by 2028. But the challenge isn’t just about upgrading technology. The real issue lies in navigating a practical route between patching up legacy systems and undertaking a high-risk, full-scale overhaul. Striking this balance is essential, especially as demand for real-time payments and ISO 20022 compliance grows, pushing financial institutions towards a structured, phased approach.
Calculating the real expense of legacy payment systems
The inability to respond quickly to market needs plagues traditional banks, with research showing only 32% believe they can meet demands in a timely manner. The average 3.8-month product launch timeline highlights how costly modifications to non-scalable systems continue to hamper innovation and complicate compliance efforts.
This lack of agility stems directly from outdated infrastructure. Studies reveal that 53% of financial institutions still operating on legacy platforms struggle with scaling due to fractured data environments and production bottlenecks; which simultaneously increase costs and operational risks. Meanwhile, cloud-native challengers – the fintechs and neobanks – rapidly expand their offerings and market presence.
Recent service disruptions among major UK banks underscores these challenges, with outages frequently attributed to ageing online banking systems. These legacy platforms fundamentally lack compatibility with modern APIs and real-time processing capabilities, creating significant disconnects between traditional infrastructure and new digital solutions.
This technological gap is hardly surprising given the history behind many financial powerhouses. Established banks carry decades of technological baggage – mainframe systems constructed long before the era of APIs, cloud computing, and instantaneous data exchange became industry standards. Today, this inherited infrastructure represents not just a technical challenge, but an increasingly unsustainable business liability.
Why ripping and replacing isn’t the answer
While completely replacing legacy systems might seem ideal, this approach comes with significant drawbacks. Full-scale system overhauls are costly, complex, and risky endeavors that can drain resources and disrupt business continuity.
IT teams are often stretched thin, juggling maintenance, regulatory updates, and security challenges alongside modernisation efforts. Complete replacements require substantial expertise, time, and financial investment – resources many financial institutions cannot easily spare. Further, many banks lack in-house expertise to manage comprehensive system updates, leading to prolonged downtimes and increased costs.
So, even if it promises better long-term results, the invasiveness of wholesale replacement sacrifices tomorrow’s operations.
Embracing incremental transformation
Banks recognise the need for modernisation but are wary of the cost, complexity, and risk of full-scale system overhauls. Instead, an incremental approach, where modernisation happens in phases, has emerged as a more practical and risk-averse strategy.
While it can be a slower process, a phased approach offers a safer path, allowing institutions to upgrade high-impact areas like payments, onboarding, or compliance first before scaling cloud adoption. This controlled rollout minimises disruption while improving efficiency and scalability. It’s a shift reflected in rising global IT modernisation spending, as banks prioritise agility without jeopardising stability.
Building a payments strategy that lasts
The evolution of the financial landscape presents a critical challenge: how to strike a balance between maintaining innovation-restricting legacy systems and embarking on resource-intensive replacement projects. As technology investment budgets increase, financial institutions must not deliberate on whether to transform, but identify a practical, step-by-step approach to modernisation.
Real-time payment adoption and ISO 20022 implementation are accelerating this transition timeline. These systems offer enhanced data processing capabilities and speeds that older systems simply cannot provide, making measured modernisation approaches particularly valuable for meeting new standards without complete system replacement.
Financial institutions also benefit from payment platforms that offer high-configurability through low-code and no-code design options. These solutions enable banks to modernise gradually, avoiding the complications typically associated with complex replacement initiatives.
With minimal coding requirements, even non-technical team members can contribute to integration efforts, reducing pressure on IT departments and expanding other departments’ skillsets. Instead of intricate programming, modernisation teams can leverage intuitive interfaces to streamline payment infrastructure integration, enacting upgrades without comprehensive system reconstruction.
Ultimately, this new way of thinking helps institutions future-proof their technology foundation while decreasing dependence on legacy systems. It also creates pathways toward cloud-native architecture and Payments-as-a-Service models, delivering additional advantages in cost reduction, extensibility, and overall performance.
