Spending on outdated payment systems is expected to reach $57.1bn by 2028. Traditional banks have long relied on legacy systems as the backbone of their operations. But outdated architectures, data silos, and lack of interoperability make it difficult for banks to meet customer expectations and remain competitive. These once-dependable systems are now costing businesses.
Financial institutions worldwide are ramping up investments in modernisation efforts. The real challenge isn’t bridging the gap between legacy and cloud-native systems – it’s finding a viable middle path between staying on legacy systems with “do or die” tweaks and completely ripping and replacing them.
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The requirement to modernise is only being accelerated by demand for real-time payments and ISO 20022 standards, pushing financial institutions toward a mid-way point that balances risk and cost.
The hidden costs of maintaining legacy payment systems
The world’s financial powerhouses tend to be companies that have stood the test of time – banks come with a history, and their histories come with mainframe-based platforms, built decades ago, long before the advent of APIs, cloud computing, and real-time data exchange.
In the UK, major banks have recently experienced outages, suspected to be the result of outdated online banking systems. Legacy systems cannot support modern APIs and real-time data processing, hindering connectivity between traditional infrastructure and new digital solutions.
Beyond technical constraints, legacy systems hinder business agility. Research found that 53% of financial institutions still using them struggle to scale due to data silos and production bottlenecks, driving up costs and operational risk. Meanwhile, cloud-native challengers rapidly scale and launch new products, leaving traditional banks struggling to keep pace.
So, it makes sense that only 32% of banks believe that they can respond to market needs in time, with an average product launch taking 3.8 months. This lack of agility highlights the pressing need for institutions to rethink their costly tweaks to non-scalable systems that stifle innovation and test compliance.
The risks of wholesale replacement
While completely replacing legacy systems might seem ideal, this approach comes with significant drawbacks. Full-scale system overhauls are costly, complex, and risky endeavours 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.
The value of 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.
Finding a viable middle path
Banks need a high level of payments configurability with low-code and no-code design capabilities that allows financial institutions to modernise incrementally without the pain points of complex replacement projects.
Where there is minimal coding required, even citizen integrators can ease strain on IT resources. Instead of complex coding, modernisation teams can use intuitive interfaces to streamline payments infrastructure integration, making it easier to modernise without a complete system overhaul. These platforms help banks future-proof their technology stacks, reducing reliance on legacy systems. They also help pave the way towards adoption of cloud-native and Payments as a service solution, offering further benefits in terms of reduced cost, greater extensibility, and superior performance.
The global shift toward real-time payments and ISO 20022 is also accelerating this transition. These developments demand enhanced data capabilities and processing speed that legacy systems struggle to deliver, making the “mid-way” approach particularly valuable for meeting these requirements without time and resource-intensive wholesale replacement.
As the financial sector evolves, the integration of legacy and modern payment systems remains a pressing challenge. It comes down to striking a balance between the twin poles of maintaining non-scalable systems that stifle innovation and test compliance, and introducing a complex project, heavy on resources, high in risk.
As IT modernisation budgets rise, the question isn’t whether to transform, but how to follow an incremental path toward feasible transformation.
Nadish Lad is Global Head of Product and Strategic Business, Volante Technologies
