8 Best Practices for Financial Services Modernization

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From digital marketing to digital distribution and everything in between, it can sometimes seem as though the financial services industry has gone all-digital everything. But if that’s the case, why do so many financial institutions continue to rely on decades-old technology to perform core processes? 

The truth is, although there is a genuine need for digital technology and digital transformation within the financial services industry — not to mention a demand for it from customers — many organizations struggle to justify the cost of updating or replacing legacy systems. Regionalization, a constantly changing regulatory landscape, and emerging cybersecurity threats only serve to further complicate the situation, creating new and evolving challenges for every player in this marketplace.  

The good news is that modernizing legacy applications needn’t be prohibitively expensive and can offer financial institutions the flexibility, agility, and strong security posture they need to thrive in the modern financial services landscape.  

What are Legacy Applications? 

The term “legacy application” describes any software program considered outdated by current standards, but that is still in use (and may play a critical role in day-to-day operations). Most legacy applications utilize monolithic architecture and are single-tiered, which means they combine multiple components within a single application.

Legacy applications typically have sizeable — even sprawling — codebases, which can make them large and unwieldy to manage. Their relative size also makes legacy applications slow to start up, complex to understand, and difficult to scale or upgrade. Furthermore, legacy applications are often incompatible with current operating systems and IT infrastructure and more vulnerable to cyberattacks.      

In spite of these challenges, many financial services organizations have been reluctant to modernize, in large part because they’re risk-averse by nature. At present, many legacy systems run business-critical applications, and there’s a legitimate concern that application modernization could lead to system downtime or loss of functionality. This fear has prompted institutions to repeatedly place patches on legacy applications rather than modernize them.  

The problem with this approach is that many of these legacy applications rely on antiquated programming languages — languages in which a dwindling number of programmers are fluent. As these programming languages die out, financial services organizations will have trouble finding programmers capable of supporting these legacy systems and risk loss of business-critical functionality if they don’t take action. 

What is Application Modernization? 

Application modernization — also known as software modernization or platform modernization — refers to the process of updating legacy systems to support new computing approaches and functionality. According to Microsoft, the purpose of modernizing legacy applications is “to improve organizational and technological performance, enhance the quality of customer and employee experiences, and accelerate time to market for new offerings and updates.” 

Part of the appeal of application modernization is that it doesn’t require financial services organizations to retire or completely replace existing systems. Instead, it involves making iterative improvements to legacy applications. This approach enables institutions to extend the life of their existing systems while taking full advantage of the latest tools and technologies.  

Most modernized financial services applications leverage a microservices architecture. Microservices are small, self-contained, and loosely coupled services, each with its own independent codebase. Development teams can deploy microservices independently, or collectively as an architecture. Microservices grouped into an architecture use application programming interfaces to communicate with one another.  

Compared to legacy applications that utilize a monolithic architecture, modern applications built on a microservices architecture are easier to manage and update, more reliable in the event of bugs, and more agile.  

Challenges Financial Services Organizations Face 

Financial services organizations face a wide variety of challenges, many of which can be alleviated — or even solved — by modernizing legacy applications. These challenges include: 

  • Changing Regulations:  Digital banking, increasing data collection sophistication, and geopolitical security challenges continue to reshape the financial services landscape. Regulatory “perimeters” continue to expand and regulatory expectations are rapidly increasing. From consumer education and protection around digital assets to the impacts of climate change on the financial services industry, there is a considerable list of transformational topics that will inform regulatory priorities now and in the years to come.  
    With so many possible or pending regulations to track and implement, and a lack of alignment across the state, federal, and global agencies, financial services institutions will need the flexibility to adapt to sudden changes within the landscape to ensure compliance — flexibility they can only gain through legacy application modernization.  
  • Cost Transformation: In the immediate aftermath of the COVID-19 pandemic, many institutions prioritized cost reduction to offset the financial strain caused by the corresponding economic decline. Now that the economy has rebounded, institutions have shifted their focus to cost transformation — that is, allocating capital for strategic investments that empower them to design more engaging customer experiences, optimize distribution models, and excel in an increasingly crowded and competitive market.  

    Application modernization is one of the most effective means of freeing up capital for this particular purpose. Maintaining legacy applications and managing their accumulated technical debt can be a costly endeavor. Since modern, microservices-based applications are small by design, they’re much easier to maintain and manage and can drastically reduce development costs in the long term. 

    Finally, since legacy application modernization takes an iterative approach, it’s far more cost effective than a complete rip-and-replace. This makes it far easier for financial services organizations to justify the cost and allocate the necessary resources.   
  • Lack of Interoperability: Most legacy applications are incompatible with new technology, which means essential data — including loans, investment products, and ancillary services — can end up trapped within systems that cannot communicate with one another and impede operations. By modernizing legacy applications, institutions can support the seamless integration and interoperability between business-critical systems.
  • Cybersecurity Threats: The vast quantities of customer data financial services organizations generate make them a prime target for cyberattacks — attacks that require advanced analytical software to detect and mitigate cyber threats. Since legacy systems are not compatible with new technology, financial services modernization holdouts cannot take advantage of the latest cybersecurity features and techniques. Institutions that embrace application modernization not only reap the rewards of enhanced security, but also of greater scalability, which means that they can easily roll out new cybersecurity capabilities across the entire organization. 
  • Market Competition: To keep up with — let alone outpace — established players and new market entrants, financial institutions need to be able to bring new products to market at speed and adapt to changing consumer demands. This requires a level of business agility and innovation that legacy systems simply cannot deliver. Since microservices are small and self-contained, they can be deployed quickly and independently, granting institutions the freedom to rapidly develop, test, and launch new products and pivot as needed. 
  • Shrinking Margin on Costly Operations: For financial institutions, the ability to manage operational costs at scale is essential. Unfortunately, legacy applications often reside in large, expensive data centers with operational costs that make it difficult for institutions to improve margin and price their products more competitively. Application modernization presents the perfect opportunity to move legacy workloads from the data center to the cloud, taking advantage of new economies of scale and significant cost saves not otherwise achievable.  

The Value of Legacy Application Modernization  

In addition to helping institutions overcome some of their most pressing challenges, application modernization also offers a wide range of benefits, including: 

  • More flexible and tightly integrated systems that allow for optimized product innovation cycles and accelerate speed-to-market for new offerings 
  • Compatibility with advanced, customer-centric technologies that allow for hyper-personalization, such as artificial intelligence, machine learning, and predictive analytics 
  • Optimized and personalized front-end customer experiences that drive growth, enhance customer satisfaction, and secure long-term loyalty 
  • Access to advanced cybersecurity capabilities that enable institutions to strengthen their security posture and proactively prevent risk rather than just respond to it 
  • Reduced infrastructure, operating, and maintenance costs by moving systems off of on-premise servers and into the cloud 
  • Increased efficiency and productivity in underwriting and claims resulting from business process automation 
  • The ability to easily scale systems up or down as needed, enabling financial services organizations to grow their infrastructure along with their business 
  • The opportunity to set the tone for organization-wide optimization and create a culture of innovation and business transformation 

Common Approaches to Modernizing Legacy Applications  

Though there are quite a few different approaches to modernizing legacy applications, the three most common are: 

  • Rehosting: Also known as “lift and shift,” this approach involves moving a legacy application and all of its associated data from an on-premise environment into the cloud. Rehosting is a popular approach to application modernization because it poses minimal risk, involves the least amount of change to core functionality, and enables institutions to prove systems out before going live.  
    What rehosting offers in terms of stability, it lacks transformational value. The lift-and-shift approach to legacy application modernization does not improve upon existing systems, which means there’s minimal benefit to the end user.
  • Replatforming: Also known as “lift and reshape,” re-platforming entails moving a legacy application and all of its associated data from an on-premise environment into the cloud. Once in the cloud, minor adjustments are made to the application to enhance its functionality and the end-user experience.  
    Replatforming is considered the middle ground between rehosting and refactoring. It is popular amongst many institutions because it can be more impactful than rehosting, while still posing minimal risk to business-critical functionality.
  • Refactoring: This approach to financial services modernization not only migrates legacy application to the cloud, but it also rewrites or restructures that application’s underlying code to make it better suited for cloud infrastructure. Refactoring is necessary to convert legacy applications with monolithic architecture into modern systems with microservices architecture.  
    Although refactoring can be the most intimidating approach to modernization for risk-averse institutions, it offers the greatest bang-for-buck value, enabling companies to add new functionality and user benefits to existing applications and capture additional business value.   

Which legacy application modernization strategy a financial services company uses depends entirely upon that company’s risk tolerance and end goal. For institutions that require only minimal changes to legacy systems, rehosting or re-platforming may be sufficient. For those who want to drive true business transformation, refactoring is the most effective way forward. 

Application Modernization Best Practices 

Regardless of which path to application modernization an organization takes, there are a few key best practices to follow to ensure success:  

  1. Align modernization initiatives with business objectives. For institutions that are unsure where to begin their modernization journey, business objectives can provide a strategic roadmap. For example, an organization that aims to reduce operational costs might prioritize modernizing legacy applications that can be easily moved to the cloud, to reduce or eliminate legacy data center expenses from the balance sheet.  
  2. Secure executive sponsorship and stakeholder buy-in. For many businesses, the success or failure of any major organization-wide change — application modernization or otherwise — depends entirely on executive sponsorship. According to research from Prosci, 72 percent of projects led by extremely effective sponsors met or exceeded objectives. But institutions shouldn’t stop there. Securing buy-in from key stakeholders across and at all levels of the organization — especially end-users — is pivotal to the long-term success of any legacy modernization initiative.   
  3. Think about where you want to be in the future. With application modernization, the goal shouldn’t be merely to secure quick wins in the short term — it should be to transform business operations and drive value in a way that sets up your company for success for years to come. To that end, financial services leaders should be mindful to take a long-ranging view of legacy modernization and choose the appropriate strategy based on their end goal.    
  4. Strategically prioritize applications to modernize. For financial services organizations with a large population of legacy applications, modernizing too quickly could prove counter-productive and cost-prohibitive — not to mention a potential risk to business continuity. The most effective strategy is to take a phased approach, implementing a steady state program of change, and prioritizing applications for modernization based on strategic objectives, delivering the greatest benefit to the business as early as possible.
  5. Tailor your approach to modernization to each individual application. Dovetailing on the previous item, each legacy application is unique and some may require more substantial rework than others to drive long-term business value. When determining which application modernization approach to take — rehosting, re-platforming, or refactoring — institutions should be prepared to make decisions on an app-by-app basis, supported by appropriate technical analysis. 
  6. Map all of your dependencies prior to modernization. Even a minor change to the functionality of a core system can have major downstream effects and failing to account for any dependencies on legacy apps slated for modernization can lead to system outages and business interruptions. Mapping dependencies before beginning the application modernization process is a smart way for institutions to prevent potential disruption and ensure a smooth transition for end-users.  
  7. Create a data migration checklist. To prevent data loss when migrating applications from on-premise environments to cloud platforms, institutions should create checklists that detail how data needs to be migrated, how that data should be presented once it’s in the cloud, and what testing needs to be done to ensure data accuracy. 
  8. Maintain open lines of communication with your end-users. Although application modernization is designed to drive benefits to the business, it’s still a significant change to the operational environment, one that will have a direct impact on end-users. With that in mind, institutions should communicate with their workforce at every stage of the process, setting clear expectations and providing their employees with the training and support they need to successfully migrate operations to the modernized systems.  

A Proven Approach to Banking and Financial Services Modernization 

To rapidly adapt to changes in the marketplace, banks and financial services firms need to move to cloud platforms and modern, microservices-based applications they can deliver quickly and iteratively. However, few have the internal resources they need to make that transition. Hitachi Solutions offers these organizations a path forward with our application innovation practice.  

Leveraging our tried-and-true Microsoft Azure and DevOps methodologies and deep technology expertise, and informed by years of industry experience, we’ll help you identify the optimal approach to modernization based on your company’s unique needs and where you are in your journey.  

Once we’ve established your priorities, we’ll develop a clear vision of where your organization needs to go and what steps you need to take to get there. Then, our technical team will work closely with your team of developers to build innovative, modern applications that are easy to use, highly scalable, and set you up for long-term success. 

If you’re ready to begin your financial services modernization initiative, we have an Advisory Services Workshop designed to help you take the first steps. To learn more about our application innovation practice, contact the experts at Hitachi Solutions today.