How the Banking Sector Can Conquer the Role of Heritage Technologies in 2024

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By Greg Holmes, Area Vice President of Solutions, EMEA, Apptio

Information technology (IT) modernisation is a top priority for UK organisations in 2024, and banks are no exception. Financial institutions, known for their agility in adopting new technologies and exploring use cases, are now racing to stay competitive in an increasingly digital world and capture the significant financial benefits it will bring.

However, beneath the surface of technological advancements, most banks still rely heavily on legacy, or heritage, technologies, including outdated architecture that is still fulfilling a purpose but may not be as efficient as newer solutions. This reliance is underpinned by an “if it ain’t broke, don’t fix it” mindset and the high upfront costs of replacing heritage infrastructure.

In 2024, we are increasingly seeing financial organisations allocate an annual pool of funds specifically for artificial intelligence (AI) and improve funding for other technologies that are driving digital innovation. Investing in innovative technologies is often prioritised over replacing older but still functional architecture.

Incumbent banks and multinational institutions must strike a balance with innovation. Because of the high levels of complex regulation and compliance to which they must adhere, they are competing with new digital banks and financial technologies (fintechs) only to an extent; retaining customer trust is prioritised over progress for progress’ sake. Consequently, trusted heritage technologies continue to form a substantial part of the IT infrastructure.

For banks and financial institutions seeking to optimise spending, finding the right balance between cost efficiency and modernisation is critical. From heritage technologies to innovative AI, financial firms can achieve this balance by consolidating their architectures, ensuring full visibility of costs and usage, and strategically deciding when the time is right for change.

The enduring appeal of heritage systems

Heritage systems present both advantages and disadvantages for financial institutions. On the one hand, these systems—built on older programming languages, databases and hardware—are often inflexible and lack scalability. They can incur high maintenance costs and have difficulty integrating with other systems and new partners.

Despite these disadvantages, heritage technologies still hold great value for large organisations. These mainframe-based platforms are often custom-built to support the organisation’s particular needs. They ensure short-term reliability and low risk. While they can be expensive to maintain, replacing them can bring significant upfront costs that are difficult to justify when the technology is still fulfilling its purpose.

However, the real challenge with heritage technologies emerges when the breadth and range of technologies within an organisation become inefficient, unmanageable and cost-ineffective. For financial institutions that are maintaining a wide range of heritage technologies while investing in new, pioneering solutions, it might be time to consolidate their IT architectures.

Consolidating IT architecture

Knowing how and when to replace older heritage systems is paramount for optimising spending and driving efficiencies. Still, it is important to note that not all heritage systems will be rendered obsolete by their modern counterparts—many still hold value and are worth preserving. The key is identifying which ones to consolidate and which ones to phase out.

One effective strategy for this decision is to be guided by how efficiently the technology is providing its service based on the unit cost, which indicates how expensive a service is based on the business output. For instance, despite high costs, a system that serves hundreds of thousands of customers annually may be worth maintaining. However, in some instances, changing customer behaviour or modernisation in other areas can cause a significant drop in usage. When this happens and cost efficiency decreases, it may be time for the system to be phased out.

A popular strategy to achieve this is to migrate the oldest operations onto more contemporary heritage systems. This can be achieved through containerisation. This process packages up software applications and their files and “libraries” them into self-contained units, allowing them to run on any infrastructure. This process revitalises these systems on a modern platform with minimal changes to the software, breathing new life into the system and reducing the number of platforms in use.

Organisations looking to consolidate or update their architectures should consider four pillars: visibility, intention, costs and communication. First, they need complete visibility of their entire IT infrastructure, what they are spending and how this is enabling their overall business goals. Equally important is clearly defining the intention behind the modernisation or migration. Is the goal to be a market leader, reduce costs or solve a specific problem? Will the new technology be employed to maintain a particular service, to be a heavy investment for the future or to win at all costs? Decisive answers to these questions will be central to driving the process successfully and keeping teams aligned.

Cost considerations should be a priority from the outset, including all implementation and maintenance costs. Evaluating whether the proposed solution aligns with the intended outcome is essential to ensuring that organisations minimise any legacy problems and inefficiencies. Finally, effective communication between teams is paramount. All teams, from FinOps (cloud financial management) to compliance and engineering, must understand the intent behind the update to guide their strategies and priorities for its rollout successfully.

Scaling cloud investments

Scaling cloud investments will be a vital part of conversations surrounding bolstering technology innovation for financial-services (FS) institutions. Cloud strategy is a crucial aspect of IT systems, partially aimed at controlling overspending and managing existing costs, especially for heavily regulated industries such as financial services—but optimisation means spending wisely rather than simply spending less.

These regulations often require separate cloud systems for different data types or on-premises storage. Consequently, banks have always envisioned their futures as hybrid, a proven beneficial strategy when compared to the cloud-only approach. In fact, organisations that opted for cloud-only are now grappling with the astronomically high costs associated with cloud expansion, unlike FS organisations that have always had hybrid in mind. This is because cloud-only is another type of lock-in that carries the risk of limiting the flexibility of companies’ innovation investments in future projects.

Collaboration is the most effective way to maximise cloud spending and ensure efficient and cost-effective cloud management. Cloud engineering, sustainability and FinOps are all critical components of building a successful cloud infrastructure, and collaboration between these teams will be key to aligning objectives with overarching business goals.

The rise of AI

Without a focus on AI, no discussion of IT modernisation in 2024 is complete. As previously mentioned, many organisations now have designated AI budgets on top of their IT ones, demonstrating the extent to which it is being prioritised.

The adoption of AI in the banking industry is not a one-size-fits-all approach. For hedge funds and investment banks, AI’s rapid data-analytical capabilities have long been used to analyse risks and refine and implement quantitative trading strategies, often at the forefront of new developments.

Retail banks’ adoption has been slower and more cautious. They are subject to stringent data-protection legislation and have reputations steeped heavily in consumer trust. Therefore, the use of consumer data has introduced a host of considerations around security, transparency and cross-border data transfer.

One area in which retail banks are investing is customer-service chatbots and digital assistants. The democratisation of AI and increased acceptance amongst the public have allowed banks to harness large language models (LLMs) and build sophisticated chatbots—thus creating more touchpoints between banks and their customers and improving end-user quality without increasing internal costs.

The rise of AI is opening a new chapter for IT in banks. Over the next few years, we will undoubtedly see new use cases take off and reshape priorities—especially as governance, compliance and regulations evolve. Organisations can prepare for this shift by consolidating heritage architecture and appropriately scaling cloud strategies—ensuring their infrastructures are ready to support and integrate new systems. Having good visibility is also required, as this allows companies to track the results of their growth investments in AI.

A recent IBM Institute for Business Value (IBV) study found that banking and financial-market chief executive officers ranked tech modernisation as their highest priority for the next three years. Identified as the key to unlocking productivity, profit and scalability, financial institutions must invest in their infrastructures to ensure they remain competitive in our uncertain and fast-moving global system.

There is no one silver bullet for achieving these goals. Building a cost-effective, efficient and trusted IT strategy will ultimately rely on finding the right combination of heritage architecture, new technologies and hybrid cloud solutions to meet the evolving demands of the customer and financial landscape.