Why Modernizing Legacy Systems is Essential for Bank CIOs in 2025

Much of the banking sector still relies on so-called ‘legacy systems’. These systems often remain due to the mindset of, "if it works, why change it?" Moreover, migrating from legacy systems is no easy task. It’s therefore important to ask why these systems remain, what it takes to modernize them, and what the consequences are of failing to do so, especially in this new age of AI.

Why legacy?

Many systems used by large banks today were originally designed and developed in the 1970s, 80s, and 90s, leveraging the cutting-edge technologies of the time. These systems were meticulously tailored to meet the requirements and demands of that era. However, as time has progressed, both technology and business needs have evolved significantly. Despite this, one aspect has largely remained unchanged: the reliance on these legacy systems.

There are a number of reasons why they remain in place. Primarily though, these systems are very resilient and have proven their reliability by handling massive transaction volumes and maintaining stability over many years.

What does it take to modernize?

Modernization hasn’t been easy and has required significant efforts from organizations – but it is essential. And now with AI, it’s become easier to update legacy systems.

Here are some key ways banks and leaders can set about modernizing legacy systems:

• Provide strong leadership and vision: Modernization requires clear commitment and strategic alignment from leadership. Secure buy-in from all your stakeholders to ensure unified support and commitment.
• Comprehensively assess systems: Evaluate your legacy system, and your business needs, then identify the appropriate alternatives. AI algorithms, for example, can analyze large volumes of data more efficiently than traditional methods. This enables legacy systems to derive insights and make data-driven decisions, improving overall performance.
• Have a clear roadmap and phased approach: Plan modernization in phases, focusing on critical systems first.
• Measure your success: Define your KPIs to monitor and evaluate the effectiveness of your modernization efforts.

Modernization is a complex process that demands meticulous planning, precise execution, and ongoing evaluation. It requires support and alignment from every level of an organization. Sometimes it also requires a realignment of strategies, processes, and organizational priorities to ensure success.

Why is it tricky to replace these systems?

Replacing legacy systems isn’t easy. There are a number of complexities involved, for example:

• High replacement cost: Modernizing or replacing these systems often requires substantial financial and resource investment, making it a daunting task for many organizations.
• Migration complexity: Transitioning from legacy systems is a highly complex process that carries risks, such as operational downtime, data loss, and disruption to services.
• Custom-built solutions: Many legacy systems have been tailored specifically to an organization’s unique needs.
• Dependency on existing ecosystems: Legacy systems are often deeply integrated with other software , hardware, and workflows – making their replacement disruptive and resource intensive.
• Vendor lock-In: Organizations relying on proprietary legacy systems are often tied to specific vendors, making migration costly and limiting flexibility.
• Lack of strategic vision: Some organizations lack a clear roadmap for modernization and fail to allocate the resources or leadership needed to initiate and execute such projects.
• Organizational resistance: Changing legacy systems within organizations can be challenging, as teams are often resistant to adopting new systems or processes. This resistance sometimes originates from the top of an organization.
• Long development timelines for modernization: Modernizing core systems can take years to complete, and long timelines can discourage organizations from starting the process.
• Business requirements take precedence over modernization: Regulatory, compliance, and business requirements often take precedence over modernization efforts.

The consequences of not modernizing

Modernization isn’t mandatory – banks can continue to operate using legacy systems (given their proven reliability in supporting essential operations).

So, why should they modernize?

• Not modernizing always incurs higher costs over time (compared to the investment required for modernization). For example, building an API for external integration on a legacy system often requires additional components from the vendor, leading to increased costs. Additionally, the implementation process is time-intensive and demands significant manpower. In contrast, building an API on a modern system is typically faster, requiring minimal effort and resources.
• Making changes to a legacy system is inherently more expensive, whether it’s for new implementations, scaling, or addressing regulatory and compliance updates.
• Finding skilled professionals proficient in legacy systems is becoming increasingly difficult. As a result, hiring and retaining such talent has grown progressively more costly over time.
• There is growing competition from emerging FinTechs that leverage modern technologies and streamlined processes to attract customers with innovative products, superior user experiences, and cost-effective solutions. Achieving this with legacy systems is a monumental challenge, given their limitations in scalability, flexibility, and integration with modern technologies and systems.

Modernization is a complex endeavour

One of the main reasons organizations hesitate to modernize and continue relying on legacy systems is the fear of disruption, high costs, and the uncertainty associated with large-scale changes. But, clinging to legacy systems can prove even costlier for big banks in the long run, as it risks inefficiencies, higher maintenance costs, and the possibility of them being outpaced by agile FinTech competitors – or becoming obsolete altogether. Considering these factors, now is the time to modernize – delaying transformation can lead to lost opportunities, weakened competitiveness, and an inability to keep up with evolving customer and market needs.