The financial services industry has long relied on mainframe systems to manage critical operations, including deposit accounts, check-clearing services, card networks, ATMs, mortgage servicing, loan ledgers, and other services. Every day, an estimated $3 trillion dollars are processed through these mainframes, making the stakes for reliable performance extremely high. While these legacy platforms have provided resilience and scalability for financial services firms, they contribute to significant operational complexity.
Why is Mainframe Modernization So Urgent?
The limitations of outdated legacy platforms are compelling financial institutions to explore the possibility of modernizing their systems, prompting banks to consider upgrading to remain competitive in the industry. Failure to address these challenges could result in firms losing their competitive advantage. Addressing the following five priorities, can help firms navigate foreseeable complexities with precision and foresight.
- Operational Complexity and High Costs: COBOL-based systems vary widely, and original programmers rarely wrote handbooks, making trouble-shooting difficult, time-consuming, and expensive.
- Business Agility: As a result of mergers during the past several decades, legacy systems from different generations are layered and often heavily intertwined. These cumbersome systems often do not give financial services firms the agility they need to support new digital-first products and delivery models.
- Scalability Concerns: More than 50% of the large BFSI firms worry about mainframe system scalability. As transaction volumes grow, the ability to scale becomes crucial.
- Shrinking Talent Pool: Firms continue to lose talent skilled in older programming languages such as Mainframe COBOL and Tandem (C, C++), which compromises their ability to support legacy platforms.
- System Incompatibility: Current legacy platforms may not be compatible with the modern systems that can provide a competitive edge through capabilities like real-time customer insights.
The Key to Mainframe Modernization Success
Each financial services firm’s modernization strategy will be a bespoke effort that leverages the following tactics:
1. Analyze the capabilities of legacy systems and develop subject matter expert (SME) knowledge. GenAI is a game-changer for firms seeking to modernize their mainframe systems. GenAI-powered analysis of the existing code base and data domains can extract the capabilities and functional flows. These tools can be used to reverse engineer or discover the current business logic of applications and build SME knowledge of legacy platforms. The objective is to derive business requirements from legacy systems, ensuring alignment with business objectives and minimizing the risk of overlooking key functionality during the modernization process. This approach then maps the key capabilities of legacy systems with SaaS-based products, packaged systems, industry cloud solutions, and/or custom-developed solutions based on the business specifications.
2. Shrink legacy systems by carving out non-transactional processes and modernizing. Organizations should identify non-mission-critical applications within the mainframe that support internal business functions such as reconciliation, settlements, customer management, and reporting. These applications do not necessarily need to be modernized or have their functionality drastically changed, but rather could benefit from being converted to modern technologies. A simple lift-and-shift will often be the fastest and least risky option to move assets to cloud or non-mainframe hardware. This approach can provide a 40-60% cost reduction and can also be the first step towards a move-and-improve strategy.
3. Pursue core modernization. Once the legacy system has been reduced to only support core functions, firms can develop APIs to further unwind the systems, removing the entanglements with other systems and replacing the core functions with more advanced technologies or event-driven architectures. They can also incorporate commercial off-the-shelf (COTS) products based on the business requirements. The API strategy will be the key to enabling incremental modernization of core functionality, ensuring that the new and legacy platforms can coexist without impacting customers and business.
4. Reimagine the process and data. Financial services firms have a great opportunity to reimagine process, data domains, and data governance while modernizing systems to infuse GenAI. Firms must focus on developing an AI infusion strategy for core processes such as payments, AML/fraud, lending, and wealth advisory to ensure that AI complements human talent and drives efficiency and innovative services for customers.
5. Consider adoption a cloud-native or cloud-first approach. Leverage cloud-native architectures to build the target solution. Evaluate options based on a) the current adoption level of cloud at the enterprise level, b) the co-existence of legacy and modern platforms leading to additional operational complexity, c) the robustness and security posture of the new platform, d) the modernization spend (CapEx vs OpEx), and e) go-to-market strategy. Firms should also consider the options of public, hybrid, private cloud and validate them based on these factors.
6. Customer migration. Establish a framework and migrate a low percentage of less risky customers to validate processes across various products and services before bulk customer migration. The framework should address the following: a) identify the low-risk customers and incentivize them to participate in the initial migration plan, b) establish a data and transaction reconciliation process to avoid revenue losses, c) deploy SWAT teams to provide quicker resolution to customers, d) automate testing/validation of the end-to-end customer migration process across product value streams, and e) synchronize the data between legacy and modern platforms for a unified customer view.
7. Focus on governance. While developing the modernization strategy, it is extremely important to focus on achieving the right balance of cost takeout, customer experience, zero business disruption, and revenue growth to maximize the benefits to the institution. Establishing robust governance, defining modernization metrics, and tracking them continuously will drive successful legacy transformation.
The Mainframe Modernization Imperative
Modernizing legacy mainframes is very complex, expensive, and risky. Therefore, it is crucial for financial services firms to take a careful, strategic, incremental approach to modernization. When Wipro engages with clients on mainframe modernization projects, we focus on business continuity, ensuring customer service is not disrupted, enhancing business agility by reimagining processes, adoption of emerging technologies, optimizing costs, and infusing AI/GenAI into these reimagined processes. With the right priorities in place, organizations can navigate the complexities of legacy platform modernization with precision and foresight.
