Legacy Systems in Banking and Insurance: An Anchor Weighing Down Progress

Legacy systems are outdated computer systems, programming languages, or application software that are still being used despite the fact that newer and more advanced options are available. These systems are deeply ingrained in the technology infrastructure of most large banks and insurance companies, having been built up and added onto over decades.

While they seem innocuous, even quaint relics of a bygone computing era, they are actually creating huge problems for these industries. Legacy systems have become an anchor weighing down progress, innovation and growth.

The Sheer Prevalence of Legacy Systems

To understand why legacy systems are such an albatross around the neck, first consider their scale in established banking and insurance firms. A survey by Reuters found that 43% of US banks continue to use COBOL, an old programming language developed in 1959. The language used to write the code for critical systems that still run today, such as COBOL and FORTRAN, has not been taught to new programmers in over 30 years.

This legacy banking system problem is shockingly widespread:

• 95% of ATM transactions pass through COBOL programs
• 80% of in-person banking transactions rely on COBOL processes
• 92 of the top 100 banks use COBOL systems for their core banking platforms

On the insurance side, industry estimates suggest that 70% or more of policies and claims are still handled by legacy systems built 20+ years ago.

Spiraling Maintenance Costs

These aging systems require specialized skills and knowledge to maintain and upgrade, which is increasingly difficult for banks and insurers to find and afford. Because fewer and fewer programmers are trained in older languages, demand has long outstripped supply. This means crucial legacy system support and subject matter experts can command extremely high salaries.

On top of personnel costs, adapting legacy systems to work with modern computing infrastructure also requires expensive tools and technologies. Based on conservative estimates, the United States government and business sectors spend $2 trillion on technology staff, services, and products. Of that amount, at least $1.14 trillion will go toward maintaining legacy systems and other IT investments.

Yet despite massive spending, legacy systems remain extremely inefficient and prone to problems.

Barriers to Progress

With such an enormous proportion of critical business functions bound up in legacy systems, they have created almost insurmountable obstacles to progress.

Innovation Stifled

Because legacy systems use outdated programming languages and inflexible architectures, experimenting with or implementing new technologies is enormously difficult and expensive. For example, a bank wanting to add capabilities to use blockchain, AI analytics or cloud computing for certain customer-facing functions would find integrating those with back-end legacy accounting systems cost-prohibitive.

As a result, many established financial services firms find themselves unable to roll out innovative new products, services and experiences that fintech startups have used technology like cloud computing to build rapidly. Their legacy millstone makes them unable to compete with more agile competitors.

Security and Reliability Risks

Obsolete languages, unsupported databases and dated security architecture means legacy systems pose major operational risks. Any system failure from a legacy platform crash could be catastrophic. Outages at large banks routinely prevent customers from accessing accounts, affect lending decisions or disrupt transactions.

Additionally, legacy systems are more vulnerable to cyberattacks aimed at known weak points. Hacks against banks have increased in scale and frequency as criminals realize how exploiting legacy infrastructure can reap big rewards.

Compliance Headaches

New banking and insurance industry regulations demand modern capabilities legacy systems often don’t have, like real-time fraud monitoring. Upgrading them to comply can require enormous code changes across multiple systems. Non-compliance fines can pile up into billions across an enterprise.

Costly Mergers and Divestitures

Institutions attempting to merge or acquire other banks and insurers (or sell off business units) run into massive integration challenges. Meshing customer data, policies, accounts and other information across vastly different legacy systems is extremely difficult. Consultants have to be hired for massively complex integration projects that still often fail.

The Path Forward

Banks and insurance companies are keenly aware of the competitive disadvantage legacy systems confer. However, with decades of technology debt to pay down and critical business functions dependent on legacy platforms, the way forward remains unclear. Total modernization is cost-prohibitive even for the largest financial institutions.

Some techniques being used to start aligning legacy systems with modern needs include:

• API Integration: Application programming interfaces (APIs) can be built on top of legacy systems to enable integration with new technologies without having to do a ground-up overhaul. This helps bridge old platforms with new capabilities.
• Microservices: Transitioning some legacy functions to microservices architectures allows portions of systems to be modernized without disrupting entire platforms. This makes upgrades cheaper and lowers risk.
• Data Migration: Migrating data trapped in legacy systems to modern databases and data lakes has also gained traction. This has not eliminated the legacy system yet, but it can unlock trapped data.
• Cloud Hosting: Moving legacy platforms to managed cloud hosting services has been successful for some firms. This resolves hardware and operational support challenges even if core code issues remain.
• Decommissioning: When possible, some legacy systems can be targeted for decommissioning if alternative ways of handling their functions are developed. This whittles away legacy platform dependencies slowly over longer time horizons.

The Stakes Could Not Be Higher

As difficult as it is for established institutions to move off of legacy systems, they know standing still is not an option. New competitors are gaining ground rapidly by avoiding the technical debt and complexity of legacy platforms.

Without making progress in modernizing, legacy-laden firms will slowly but surely lose customers to upstart rivals offering fast digital experiences, cutting-edge features and real-time analytics incumbents cannot match. Over time, they risk becoming the next Blockbusters or Borders bookstores – felled by the very legacy systems that were once their backbone but became an anchor sinking them in a new digital world.