Can You Afford to Keep Your Back Office?

Patches and updates won’t cut it in an increasingly competitive payments industry. Time to install modern computing power.

While some financial institutions try to hang on to their legacy systems, the costs to manage, maintain, and repair these systems are rising. Many now spend more every year on patches, updates, and integrations to keep pace while still falling behind the competition and missing out on new growth opportunities.

The question is no longer whether companies can afford to replace their back-office system. It’s whether they can afford to hold onto their legacy systems. A modern payments platform offers continuous long-term benefits in the form of cost reduction, increased efficiency, and greater agility to compete and adopt the latest payment methods. Organizations that modernize can start accruing operational benefits and reducing long-term costs.

While financial-services organizations strive to improve the customer experience with advanced applications and real-time payments, many still run their back office with outdated software. There’s a common perception that updating a back-office system is time-consuming and expensive.

Some organizations have concerns about the migration process or lack a qualified team to help with the transition. Others worry that a full “rip and replace” of their entire banking core or back-office system will have a widespread impact on their channels and operations. And some also need help finding internal funding for upgrades as they still carry technical debt from their legacy systems. According to McKinsey, the cost of technology debt can run between 15% and 60% of every dollar spent on IT.

Many companies are also tied to these systems through decades of connection with people and technology, making it hard to break habits and escape the mindset of “what has worked.” And when contemplating an upgrade, internal departments can have competing priorities, while the enormous task creates some uncertainty about where to begin.

As a result, many feel that upgrading legacy systems is easier said than done. These perceived pushbacks lead some organizations to continually kick the can down the road and hang onto antiquated systems far longer than they should.

‘Frankenstein’ Systems

While these organizations attempt to stretch their legacy systems and make them work, maintenance, fixes, and integration expenditures are continually rising. One study by IDC Financial Insights found such costs are rising nearly 8% annually, and global financial institutions are projected to spend $57 billion on outdated payment systems by 2028.

Since legacy back-office software applications are older than current technology, it can be difficult to find ongoing support and technology resources to maintain these applications.  “As underlying operating environments modernize, the supporting infrastructure for legacy systems can begin to age out,” said Peter Tapling, managing director at PTap Advisory.

Back-office legacy systems also have many indirect costs that don’t always appear on the balance sheet. For example, many are slow and inefficient. Poor user interface designs can impede the customer experience and hamper the ability of employees to do their jobs effectively. Many of these systems are also prone to operational errors, which can lead to downtime and a poor customer experience.

As the U.S. economy rapidly adopts real-time payments in the next few years, these legacy systems will seem even more burdensome. Most were designed to support card-based transactions, which process every few hours or every few days. By contrast, modern real-time payments must happen in seconds, with 24/7 demands.

Some financial institutions try continual updates with add-ons and patches, but end up with siloed and unintegrated “Frankenstein” systems that cannot support message formats like ISO 20022.

Even as organizations may be operationally comfortable with their legacy systems, it’s becoming more difficult to find the talent to operate, manage, and repair them. According to Deloitte, COBOL programmers and employees with deep knowledge of other legacy systems are aging out of the workforce, while younger programmers are being educated in modern platforms.

This lack of talent, combined with poorly documented systems and unattended known vulnerabilities, also poses security risks which could lead to significant financial liabilities in the event of a data breach.

Finally, because legacy systems cannot be scaled or quickly adapted to market changes, they also carry massive opportunity costs. This often puts companies years behind in adopting the latest payment methods or in capitalizing on innovative trends.

The Real Question

Continually upgrading out of date back-office systems is a costly, time-consuming, and impractical way to evolve in today’s rapidly changing ecosystem. The real question may not be the cost of upgrading the back office but the cost of not upgrading it. While a back-office upgrade does take time and money, it’s an investment that yields ongoing, long-term payoffs.

“Payments providers need to have modern platforms in place to keep up with the pace of change and disruption in the payment industry. This enables providers to respond to market demands more quickly with competitive solutions while reducing risk,” said Patricia Partelow, managing director of financial services consulting at EY.

One of the first ways a modern back office saves money is through increased efficiency. Eliminating manual processes often reduces the demand for labor, enabling employees to focus on more high-value tasks.

An updated payment system also helps organizations eliminate operational bottlenecks. The centralized transaction repository and a continuous processing architecture enable organizations to use one system for traditional and real-time payment methods. Managing all payments in one place with a configurable rules engine, security infrastructure, and a multi-tenant browser-based user interface reduces labor and software costs.

Upgrading a legacy system can also help organizations respond faster by easily supporting new regulations and payment types without the high costs and delays of code changes and configuration adjustments.

And because a new system is scalable, financial institutions can keep adding new payment methods with unlimited volume. Robust analytics capabilities also offer opportunities to improve the customer experience and loyalty with new products and services.

Hanging on to a legacy back-office system is like hanging on to a long-outdated version of Windows. While patches and updates may serve as temporary fixes, they are neither a long-term solution nor a viable means to compete in the financial-services sector.

As costs and missed opportunities mount, organizations should realize they can reap long-term benefits and cost savings by modernizing their back-office environments.

—Kate Knudsen is senior program director at BHMI