How to Let Go of Legacy IT Systems: Tips for Financial Institutions

In the decade following the 2008 financial crisis, two clouds loomed over the banking sector: low profitability and legacy technology.

Regulators overseeing the recovery were concerned enough about the reliance on older proprietary systems to warn that a reluctance to move on could bring on the next economic meltdown. Each leap forward in technology left the older solutions further behind, and then the coronavirus pandemic hit.

This Black Swan event brought enormous organisational, technological and cultural transformations that touched every aspect of our lives. For banks, it condensed several years' worth of changes into a handful of months.

The 2021 Capital Markets Innovation Summit (CMIS) report, Letting Go of Legacy IT Systems in 2021, detailed the extent to which leaders have taken on board the lessons of the last year, and experts gathered by Confirmation explored some of the themes and findings in a special webinar.

Here are the main takeaways from Letting Go of Legacy IT Systems in 2021.

The tide went out, some were swimming naked 

"Banks, asset managers, pension funds, all had the same problem; a stack of quite old technology that is like a plate of spaghetti," said Stephane Malrait, Managing Director, Head of Markets Structure & Innovation at ING. "It's not good enough."

The industry is now in what he calls the third phase of the crisis, having negotiated the survival period and the adjustment to new ways of working. "Banks didn't think too much about legacy systems at the start of this, but now the focus is on improving technology, knowing that this has exposed how poor some systems are."

Many survey respondents reported outdated onboarding and transaction approval processes which were a priority for improvement in the coming 12 months, having been badly exposed during the pandemic as unsuitable for the future of work.

“One large bank lost about 750 hours in one month from a single team because they were trying to sort out technology, order laptops, get VPN connections etc.,” said Caroline Winch, Commercial Director at Confirmation, part of Thomson Reuters.

"Institutions that heavily outsourced processes overseas really struggled," said Kyle Gibbons, Europe Managing Director of Confirmation. "It may be something they think about in future, as in terms of their resilience, this could quite easily happen again."

Be bold 

Survey respondents identified technology to mitigate risk (35%) and technology that responds to the changing expectations of their clients (32%) as the most important. The experiences of the last year have put a premium on adding value for clients, respondents said, and 38% have committed to working with third-party providers to deliver this.

"Clients became that much more demanding; they had their own challenges," said Caroline. "All of this has accelerated partnerships with outside fintech firms, as opposed to building everything in-house that firms may have done a few years ago."

Respondents favour leveraging in-house talent with outside expertise to build and manage new processes that will improve operational resilience and increase profitability. One-stop solutions, often run on closed platforms with expensive, multiyear, license-based models are out. Partnering with outside firms is in.

"Just having an innovation hub won't help your business move forward, it will be far too detached from your day-to-day activities," said Stephane. "Having your IT department work with your innovation team and partner with fintech companies requires a cultural change but you have to be bold. Be curious, be willing to learn and find companies you are not aware of. There may be a company out there who can help your business or your clients."

Clean up your data 

"The poor quality of architecture and data is behind so many problems big banks have," said Ange Johnson de Wet, Head of Cloud and Technology Change Risk, Risk Division in Lloyds Banking Group. "Most large incumbents should hope for a nice, clean, single data lake with all the common taxonomies and protocols. That is where many should be heading."

Shifting operations to the cloud is seen as the most optimal route forward for most institutions, according to the survey, but the panel warned it could lead to a new set of problems if a coherent strategy isn’t in place beforehand.

"The original rationale of moving to the cloud was one of cost; moving from data centres and moving the working capital meant you'd only be paying for storage," said Kyle Gibbons, Europe Managing Director of Confirmation, part of Thomson Reuters. "Over time, the challenges, being able to unlock that cost saving, have become more difficult."

Both Gartner and Google said unless the way firms manage costs is significantly transformed, then around 30% will be misspent, Kyle said, adding that the true agility and flexibility of new tools will only be realised following careful integration.

"There is a realisation that if you can analyse the data and the quality is good, you can do a lot more for your company; you get a lot more insight into what the client is purchasing. You see it when you buy on Amazon or on Netflix," said Stephane. "The value for them is in the data around the experience."

Change is hard (but not impossible) 

Businesses are optimistic, if nothing else, and are keen to develop automated solutions to key problems, the report found.

"Firms are looking to be more strategic, and the pandemic showed us the need to increase automation to maintain operational resilience," said Caroline. "We've also seen a keen interest in both banks and accounting firms to deploy APIs, to automate some or part of processes." The Confirmation team encountered a lot of enthusiasm for single sign-on implementations, Caroline said, in order to maintain control of access systems. "You can't have too many people having too much access to different platforms, without some sort of control," she said.

More than half of respondents (52%) said machine learning and AI tools were a priority in strengthening regulatory compliance and operational efficiencies.

"A great, smart strategy when transforming is to take a selective approach," said Ange. "I saw one bank break things down into an optimisation zone and a transformation zone. Certain things they transform, other things they will optimise. It's simple and it makes a lot of sense."

Have a plan, and don’t wait for the next pandemic

One in four firms reported challenges in adopting new technologies, and this is forcing reflection and redefinition of strategies.

"Look into your processes, what is efficient and ineffective and think about technology that can provide flexibility to deliver exceptional customer experiences and keep yourself ahead of the curve," said Caroline. "Don't wait for the next pandemic to make these leaps."

Businesses are looking long-term, the report found, and in the face of increased competition are more aware of their limitations than they were 18 months ago.

"If you can't fix your legacy, at least put a plan in place to do so," said Ange. "Think outside the box and leverage best practice, and look at other industries, such as what the big tech firms are doing. If you make sensible, achievable, actionable moves towards your target, you will get there."

For all the headaches it has caused businesses, the panel felt the last year has triggered a sea-change in attitudes, and in the next 12 months, capital markets will accelerate the move away from legacy systems.

"When Ford started building cars, it built every component," said Stephane. "But looking at Tesla today, all they make is the battery; all the other parts are built by outside companies. We are moving to this model in finance. It may take 12 to 18 months to integrate a new technology and see the value of automation at first, but after a while, as you mature and rely less on legacy infrastructure, that will become three to four months."