App modernization in finance

Banking is digital: a study by the FDIC (Federal Deposit Insurance Corporation) in the United States found back in 2001 that around 80% of people between the ages of 15 and 44 use online banking or bank mobile applications as their first point of contact. The number remains above 70% for consumers up to the age of 54 and above 60% for 55-64.

Digital transformation has enabled companies to expand their coverage without risk and with controlled costs: it is no longer necessary to open a branch to access new customers, but simply bring the right tools to their devices.

This approach has led to new challenges in the industry. On one hand, the increased competition with the arrival of fintechs.  Although these companies encountered high barriers to entry into a highly regulated market managed by giant companies, they managed to impose themselves in many cases because they have the innovative gene in their DNA and, therefore, are more agile and have a faster response capacity to deliver digital solutions to their customers. 

On the other hand, the heavy burden of legacy systems: robust, solid and very reliable systems that have been in place for decades but can be a significant obstacle for the future of the business, as they are difficult to maintain, difficult to upgrade and, in many cases, are technologically obsolete or even hinder the implementation of cutting-edge technologies.

The key concept to answer both dilemmas is “app modernization”.

Different approaches to modernization

There are different approaches for a traditional bank to modernize its applications, ranging from subtle upgrades or modifications to ensure that old systems work, to a redesign from the scratch.

The market consulting firm, Gartner, had identified seven modernization models that apply to all industries: 

1. Encapsulation: making legacy system data and functions available as a service. 
2. Rehosting: bringing legacy system elements from an old architecture (such as mainframe) to a new one (such as cloud).
3. Restructuring: migrating it to a new execution platform. 
4. Redesign: backend changes to improve performance.
5. Re-architecturization: code changes to adapt it to a new architecture.
6. Rebuilding: redesign to bring it to a cloud-native environment.
7. Replacement: ditching the existing one and implementing a new one.

In banking, the most common is to bring the usual functionalities to a digital level and launch an app or a home banking website that reflects the main operations, taking advantage of the power of new technologies that abstract the application layer from the underlying technology, such as APIs (application programming interface) or containers. 

New migration models

A new migration model also appears: creating a neobank, i.e., a parallel branch designed directly with a technological profile, as fintechs do. In this way, the institution has the option to go to market quickly with innovative proposals and gain time to achieve an orderly and thorough modernization of its legacy systems.

Another path that many traditional banks are taking to add new technologies quickly and effectively is to partner with fintechs – the same ones that were initially perceived as competitors – in collaborative ecosystems in which the traditional institution contributes its know-how in processes and the startup adds its agility and technological vision.

There is no single path: each banking institution must find the best way to modernize its applications. That is why the support of a technology partner with experience in this industry is key to achieving the desired results.

Banks’ legacy systems were essential for the financial services to develop and grow, but today they take the risk of anchoring institutions in the past, just when the industry is rethinking its future.