How banks can modernise legacy systems with APIs

By Danny Healy, financial technology evangelist,MuleSoft

These are challenging times for traditional financial services firms. On the one hand, they need to speed up their adoption of new digital platforms, so that they can meet the demands of modern customers and compete with disruptive fintech players.

On the other hand, they also need to transform how they connect to the legacy systems that underpin much of their business if they’re to integrate seamlessly with these new digital platforms. Faced with the challenge of bridging the divide between two very different generations of IT, many banks are struggling to find the most effective way forward.

MuleSoft’s Connectivity Benchmark Report 2018 recently revealed that 42 percent of organisations cite legacy infrastructure and systems among the top three challenges to digital transformation. Since legacy systems contain immense value and are embedded across banks’ operations to such a large extent, the ‘rip and replace’ approach simply won’t work. However, continued reliance on these monolithic systems makes it difficult to innovate at speed. This highlights the impact that legacy IT systems, such as mainframes, have on a bank’s ability to innovate and remain competitive.

As legacy systems form the backbone of most financial organisations, it’s not surprising they are still relied upon. Yet at the same time, these organisations need to modernise their legacy systems to survive in a business landscape where fast and agile beats slow and static. So why are they still so reliant on legacy systems and what can they do to modernise them?

 Why break from reliability, security and resilience?

Although their heritage dates back more than half a century, legacy systems offer the kind of security, reliability and resilience that banks desire. That’s why they’re still used to support critical functions such as deposit accounting, policy administration, loan servicing, and payment processing. It’s also why banks store the bulk of their most valuable data on legacy systems. However, while well suited for intensive data processing tasks, legacy systems are less aligned with many modern business requirements. For example, they can be inefficient at accommodating new consumption experiences and supporting rapid change, which are critical to the new digital banking services consumers are demanding.

If unable to simply abandon legacy systems, banks must find a way to “refresh and extend” them so that newer digital platforms and technologies can plug into the immense value they possess. While innovation does not happen within legacy systems themselves, they are where the data that fuels innovation is stored. By finding creative ways to unlock and use the data stored in legacy systems, banks can decentralise access to their data in order to enhance customer experiences.

This can be achieved with code written on top of legacy systems that allows access to a limited set of data. For each set of data, different units of code can be written, thereby componentising the information housed in the legacy system. Furthermore, the collection of those units provide an agility layer that allows other systems or business partners to access the data without having to depend on the underlying complex system directly. Banks must therefore look at how they can create this agility layer between existing legacy systems and newly adopted applications, such as Salesforce and Workday.

 The API transformation 

APIs essentially become a kind of ‘digital glue’ that enables the integration that today’s banks require, providing the necessary agility layer between new and existing IT. In simple terms, APIs allow applications to talk to each other and share data. Using APIs, banks can quickly plug and unplug applications, data sources and devices into their growing application networks. As a result, banks can drive innovation at speed and compete more effectively.

A major benefit in using APIs is that consumers of the data need only interact with the API itself; they don’t need to understand how to connect with the underlying legacy system or data source. As well as providing greater agility, this also helps banks overcome the challenges associated with the growing mainframe skills shortage. Most importantly, it creates long-term benefits by moving away from point-to-point integration, which creates tight coupling between applications. According to the Connectivity Benchmark Report 2018, over three-quarters of IT decision makers in the financial sector believe point-to-point integration must die if they want to reduce costs, deliver faster and remain competitive, while extracting more value from data.

HSBC is a great example of how this works in practice. The bank is using an API strategy to expand its digital and mobile offerings without needing to replace its legacy systems. For example, it created a new mobile app that can directly connect to a customer’s bank accounts through an API, enabling transactions to be categorised in real-time to offer customers greater control of their spending. APIs have enabled these services by exposing and connecting data from siloed stores, both within the bank and from third-party providers. 

Banking on a digital future

 Legacy systems clearly have a lot of life left in them, but rather than feeling trapped by their longevity, banks can follow the example of HSBC and modernise their legacy environments with an API strategy. Adopting this approach and building out an application network will enable significant benefits beyond just solving the immediate challenge of integration in a single project. Banks have a real opportunity to add value for customers and create new revenue streams by using external APIs to open up access to their products and services for a new world of third-party providers, who essentially become a new distribution network.

This makes a lot of sense in terms of the new Payment Services Directive 2 (PSD2), which was created to encourage competitiveness and innovation in mobile and internet banking, by allowing authorised third parties to access banks’ customer data. For example, property websites, used car trading forums and many more could embed a bank’s products and services on their webpages, driving the bank into a wider distribution channel and adding enormous value for consumers by creating more seamless experiences.

Ultimately, financial institutions must balance their operational demands with the strategic need to grow and compete. With an API strategy, it’s possible to both extend the life of legacy systems while supporting immediate digital transformation needs to keep up with the pace of fintechs. The enhanced capabilities and agility that this enables opens up a whole new world of possibilities for banks to embrace.