How legacy systems are slowing down innovation in Latin American banking

Digital transformation in the financial area is a strategic requirement: banking that does not innovate quickly loses relevance and falls behind.

But in Latin America, one of the main obstacles to the modernization of the financial sector are legacy systems, those old technologies that, although they continue to work, are limited in terms of adaptation and development of new services.

In this article we will explain what legacy systems are and how they are slowing down the innovation and modernization of many banking institutions, and how solutions for banking and fintech can boost the performance of this sector.

What are legacy systems?

“Legacy systems are basically older computer software, programming languages, and hardware systems that have become obsolete in terms of functionality due to the introduction of new technology, but that companies continue to use”, they explained in an article on the Integrated Research portal.

For banks, they can include everything from transaction processing systems to customer service platforms, core databases and accounting modules.

Many of these legacy systems were robust at the time, but today, having a rigid and unscalable architecture, it is rather a challenge to try to integrate new functionalities, open digital channels or respond quickly to user demands.

The direct impact of legacy systems on innovation

1. Complex and expensive integrations

Although many banks are trying to engage with fintechs and work together, as well as incorporate APIs that accelerate the development of new products, legacy systems were not designed to communicate easily with other applications, generating:

• Custom integrations, slow and expensive.
• Dependency on developers specialized in obsolete technology.
• Greater risk of errors in production.

This slows down the agility necessary to compete with neobanks and digital platforms.

2. Limitations to scaling digital products

The demand for digital services in banking does not stop growing, and it is a trend that will not stop, which puts banking institutions that have obsolete systems in check.

In a survey conducted by Q2 Holdings, it showed that 74% of consumers of different generations want more personalized experiences from their banks. And 66% expressed that they are comfortable with banks using their information to personalize their service.

However, the ability to scale these products efficiently is affected by:

• Rigid infrastructure.
• Lack of support for modern technologies (microservices, containers, cloud).
• Dependency on manual maintenance and high operation cost.

In many cases, new projects are developed on top of legacy systems, generating duplication of technology and data.

3. Delay in the adoption of real innovation

Latin American banks often face a slower innovation cycle than their counterparts in the United States, Europe or Asia. This is because:

• Modernizing legacy systems requires high investments and a long time.

• The gap between IT and business is widening: commercial areas want to launch products agilely, while IT struggles with technological limitations.

• Regulatory compliance and security on legacy systems requires extra effort to ensure that any changes do not compromise stability.

Typical consequences of not innovating and staying with legacy systems

• Late launch of mobile solutions since, although some banks try to offer modern experiences, their internal systems cannot deliver data in real time, offering an inconsistent user experience and limitations to launch functionalities such as instant payments or personalized notifications.

• Difficulties in competing with fintechs, because instead of carrying ancestral systems, fintechs simply take advantage of cloud technologies and microservices to iterate quickly and offer more attractive services.

Path forward: intelligent transformation step by step

The good news is that there are strategies to reduce the impact of legacy systems without resorting to costly “big bangs” of total replacement, such as those offered by many software service providers:

Layered modernization

Implement intermediate layers (middleware, APIs) that allow legacy systems to “talk” to modern applications.

Hybrid migration approach

Adopt cloud solutions and microservices in areas of innovation, while planning the progressive migration of legacy components.

Open and collaborative platforms

Foster an innovation ecosystem with fintechs and technology providers through open standards and API-first.

Conclusion

We should not look at legacy systems as if they were the great enemies, since they have been the traditional support of banking for decades. But without a clear strategy to modernize them or reduce their impact, they are a barrier to innovation in banking.

The financial sector is very competitive and it will be up to the institutions themselves to balance operational stability with digital agility, betting on open architectures, collaboration with fintechs and scalable technologies that allow them to offer modern, efficient and competitive financial services.