Legacy vs cloud: The financial sector’s technology dilemma

by George Iddenden
Cloud-based banking

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What is this article about? The difficulties legacy banks face when weighing up the pros and cons of moving to a more cloud-based platform.

Why is this important? As more SaaS firms make cloud-based banking facilities more accessible, legacy banks face being left behind by more agile, challenger banks, potentially eroding market shares moving forward.

What’s next? Legacy banks look to navigate a tricky set of circumstances in order to make the move towards cloud-based banking solutions

Technology, in any industry rarely fails to make its impact and improve nearly its aspects of the sector. Cloud-based banking is no different.

The traditional, often decades-old legacy systems of the 1970s and ‘80s, once were hailed as huge game-changers in their own right, however as the financial services sector becomes more complex, the need for more technologically advanced systems grows with it.

Cloud-based banking has been around for the past 20 years or so in one way or another; cloud infrastructure isn’t necessarily a new concept, the launch of Amazon Web Services (AWS) in 2006 laid the foundations for a $77 billion industry in 2024.

As is often the case when new technology arrives, it was met with hesitancy by legacy banks, many of which ignored the forward-thinking approach over concerns of about security, compliance, and regulatory issues.

However, numerous fintech companies have worked hard to break the stigma among legacy banks, pushing the technology further to the front of the industry.

Why should legacy banks move towards a cloud system?

As the banking sector becomes more complex, with concerns growing over security, data privacy and compliance technicalities, cloud-based systems can offer banks a flexible solution which can keep them moving forward in today’s industry.

The costs of running a mainframe system can be incredibly costly, an issue which SaaScada chief technology officer Paul Payne believes can be solved through cloud technology.

Payne tells Payments Intelligence: “There’s significant cost improvement when using cloud tech. This is because we’re looking after those systems for you, we’re taking advantage of the scalability and performance improvements that you have with cloud technology. So, it’s much more elastic and scalable.”

At the time, legacy systems were designed for specific functions and are often inflexible and difficult to adapt or expand.

This lack of agility makes it challenging for banks to respond quickly to changing customer demands, regulatory requirements, or emerging technologies.

With cloud-technology, the potential for downtime is minimised exponentially.

Payne says: “If you get a sudden burst of activity, we can just use AWS, which is what we’re hosted on scale up the infrastructure for the workloads that are running.

“If you needed to spin up extra resources overnight, we can do that dynamically in the cloud, and we can run extra processes, and then we can scale back down. So that allows us to get a much better, more cost-effective product to our clients.”

Open banking facilitator Caxton’s chief technology officer, Ahmed Dekmak, explains that the issue of convincing customers could hinder banks moving to the cloud and even put some off.

He says: “A pain point felt by almost all established businesses in the UK, because old habits die hard, is getting the established client base to update your bank details.

“Nobody wants to lose money, or risk losing a customer over lost funds, and as a result an organisation may be forced to retain the legacy bank account even after moving.

“In which case why bother? Two sets of bank accounts, two reconciliation processes, and an additional headache for an overworked finance team.”

Should banks be hesitant when replacing their legacy technology?

Payne believes that legacy systems could be doing more harm than good, with high maintenance costs draining resources that could be better spent on new innovative technologies – something which fintechs are able to do more readily given the lack of reliance on dated technology.

He adds this is a real advantage because “you’re not dealing with years and years of legacy build-up of complicated technology, most of which might be obsolete, but no one really dares to remove it.”

He continues: “In every industry everyone initially goes, ‘oh I don’t know about putting it in the cloud, I’m not sure it will be secure’. But over time, each industry has made that shift because the benefits far outweigh the risks.”

Payne claims that any company would be ‘better off’ in the cloud, provided the right security model is in place and the technologies to prevent breaches are in place.

He says: “We still go into places that have servers running under desks and it’s a no brainer for them to move.

It can be a little bit of a heavy lift if you’re used to doing all of that and you’ve got an IT person that’s been managing your servers themselves for years, it can be a bit of a mind shifts mindset shift.

“A lot of this is often about changing people’s minds and processes it is the technology.”

Some might argue that for all its positives, there should be a degree of scepticism involved when deciding whether to move on from the legacy model.

Dekmak adds: “If you’re using a cloud provider then you’re at running on their terms, and that statement isn’t just specific to their pricing, which is an entirely separate issue, but also their reliability, availability and how adept their security team is.

“You can be running a tight ship in security terms, but if a zero-day flaw is uncovered by a state-sponsored hacking group for a specific cloud provider then your systems are at risk. How can you mitigate this?”

He believes a hybrid model could be the best option for traditional financial service firms unsure of whether to take the plunge.

“Invest in a hybrid cloud setup where your critical infrastructure is physically accessible to your team, and not sitting in a server rack somewhere remote.”

Digital banking platform myTU’s founder Thomas Navickas says that the claim of new, faster and more agile tech may not be enough.

He tells Payments Intelligence: “The rapid evolution of software poses another challenge. By the time a ‘modern’ replacement system is developed and implemented, there’s a good chance it might already be on the verge of becoming outdated.

In a rapidly evolving technological landscape, it’s clear that change is inevitable. The financial services sector must weigh the benefits of embracing cloud-based flexibility against the risks of maintaining legacy systems.

As fintech continues to shape the industry, legacy banks must carefully navigate this transition, ensuring they remain competitive, efficient, and secure in a dynamic and ever-changing world of finance.

In the words of Navickas: “In essence, while not transitioning might pose challenges in keeping up with the latest trends and customer expectations, making the shift isn’t straightforward and comes with its own set of challenges.”

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