Highlights
- Financial institutions have embarked on core modernization programs to embrace emerging technologies, new business models, and become future-ready.
- However, these initiatives frequently fail because of disparate technology landscapes, dependence on complex legacy architectures, and the absence of a comprehensive quality engineering or test strategy, often forcing banks to abandon modernization programs.
- To ensure successful core modernization, banks must factor in quality engineering or testing at the strategy definition stage instead of performing it at the end as a tick-the-box exercise.
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Mainframe systems: a heavy legacy
The financial services industry has initiated legacy or core transformation programs in an effort to be future-ready.
Financial institutions expect the transformation to enhance their ability to embrace new technologies and emerging boundaryless business models, and better serve digital-native customers. However, these initiatives often fall short because of the complexity involved and the absence of a robust test strategy. In fact, many banks are unable to achieve the main business objectives of core transformation programs and have halted their initiatives midway to cut losses and prevent customer service disruption.
Successful core modernization in the financial services industry demands domain expertise as well as a strong testing or quality engineering (QE) strategy to manage the complexity. We highlight how a holistic test strategy is crucial to core modernization in banks.
Core modernization: an urgent imperative
For many years now, modernizing legacy mainframe systems has been an ambitious goal for financial institutions.
There are two main objectives driving such initiatives: making banking systems compatible with emerging technologies to speed up digitalization, and accelerating cloud migration given the massive growth opportunities it offers. Additionally, stiff competition from new entrants that don’t have the legacy burden puts pressure on banks to quickly adapt to market shifts and meet evolving digital demands of customers. This requires a shift to new business models such as digital ecosystem models that are incompatible with legacy systems. All this has made legacy or core modernization an urgent imperative for the financial services industry.
While many banks have initiated core modernization programs, not all have been successful. Legacy modernization is a complex exercise that involves refactoring core systems, adopting new technologies, enabling cloud migration and integrating new platforms, and digitalizing core systems and applications. Additionally, dependence on legacy architecture cannot be completely eliminated—banks will need to retain certain elements of the legacy systems such as databases that contain historical transaction data, application programming interfaces (APIs) that interact with old databases, security systems, and so on.
However, post the transformation, banks often grappled with subpar performance of systems due to inefficient integration between legacy and new systems. This resulted in monetary loss due to lack of returns from investments in the modernization program, poor customer service and experience, and adverse impact on the banks’ brand image. In several cases, the crucial business objectives of the program were not achieved, forcing banks to abandon the initiative halfway to minimize losses.
So, what went wrong? Why did these initiatives fail to yield the desired benefits even after spending millions? A detailed analysis revealed several factors at play:
- The quantum of legacy systems in the banking industry is significantly higher because banks were early adopters of IT, compared with other verticals. A large volume of sensitive and interconnected customer data resides on legacy systems, which means that banks are heavily dependent on these systems for business as usual. Securely transferring sensitive customer data to a new technology platform while ensuring data integrity is fraught with difficulties as the old security systems are dependent on complex integrations with legacy architecture. Consequently, after migrating to the new system, banks had to contend with security vulnerabilities as well as customer complaints because the banking apps failed to perform efficiently.
- A large number of banking systems spanning multiple channels (contact centers, mobile, online, chatbot, ATMs, branch), besides backend and middleware processes, run on legacy mainframes. To add to this, individual banks have disparate technology and IT landscapes. The dependence on different technologies complicates core modernization as it can result in poor integration among different systems. This affects the performance of the core banking system and ultimately customer service and experience.
- A retail or manufacturing firm can adopt a lift-and-shift approach to core modernization in a hybrid model, running both legacy and modern systems parallelly, to prevent business disruption. However, banks cannot adopt a hybrid lift-and-shift approach as it involves a complete rewrite of code, which can result in connectivity failures between legacy and new systems leading to poor performance and adverse impact on customer service. Consequently, core modernization is far more complex in the financial services industry compared with other sectors because some parts of the legacy architecture need to be retained as-is, given banks’ dependence on them for business as usual.
Several banks have been forced to pause modernization programs and switch back to legacy systems to avoid disruption to customer service. The underlying reason why most such initiatives do not produce the desired results is that banks do not factor in quality engineering (QE) or testing at the strategy definition stage. This is mostly done at the end, as a tick-the-box exercise, resulting in subpar performance of the upgraded systems, and thus negatively affecting customer service delivery.
Banks must incorporate a robust test or QE strategy into the modernization program. An efficient test strategy ensures that the enhanced systems comply with security requirements, integrate seamlessly with external interfaces, deliver uninterrupted service, and are compatible with new digital technologies. It will also enable banks to efficiently manage the complexity of the transformation and ensure success, in turn unlocking the desired business benefits.
The test strategy
The first step in the modernization process is to define a complete core modernization strategy.
QE or testing must be factored in at this stage to identify and proactively address problems that may potentially impact the functioning of the new platform.
A comprehensive test strategy that can help mitigate issues around securely migrating sensitive customer data to the new system, integrating multiple channels and disparate technology architectures, and overcoming the complexity associated with core modernization in banks is key to success. A robust test strategy must have five major components:
- Validation of the modernization strategy: Before embarking on legacy modernization, banks must define an end-to-end modernization strategy. Testing teams must check that the strategy aligns with the future business goals of the bank. This will involve evaluating if the new technologies being considered for adoption as part of the modernization program can scale to achieve future business objectives. The intent is to ensure that the new platform does not become obsolete over the short or medium-term given the significant cost and effort involved.
- Data migration testing: Sensitive customer data typically resides in legacy databases. While a part of this data is transferred to modern systems during the transformation, a portion of it is retained in legacy databases. The transferred data is prone to inconsistencies and inaccuracies, compromising data integrity. Additionally, the data that remains in the legacy database may not synchronize with the modern system. Both these issues affect the performance of the core banking system. Data migration tests help ensure the integrity of the migrated data. They also ensure synchronization between the legacy database and the new system, enabling the new system to function as efficiently as the legacy system, thereby averting adverse impact on customer service and experience.
- Security testing: For the new system to function smoothly, sensitive customer data and databases must be moved to the new platform. In addition, the application interfaces are either moved as-is or recoded to ensure compatibility with the new platform. However, during this process, data integrity is often compromised resulting in security threats. Stringent data security tests that include elements such as access controls, encryption, tokenization, and anonymization ensure security of sensitive data and compliance with data security policies of the bank. Data format and structure tests check that the new security systems integrate seamlessly with the legacy security architecture, averting security threats.
- Integration and collaborative testing: APIs, middleware, backend systems, databases, and digital banking channels need to interact and work in sync with each other to avoid business interruption. For this, seamless integration of existing disparate technology and IT architectures into the new system is key. This test helps ensure that the interaction between all the components remains intact (as it was in the legacy system) and averts adverse impact on the performance of upstream customer-facing applications.
- Modular testing: During legacy modernization, certain components of the legacy banking architecture are modularized. Modular tests ensure that each component works independently without interfering with the functioning of other components, which helps mitigate the complexity involved in core modernization in banks.
While defining the test strategy, banks must also consider the following factors, that influence core modernization:
- Business focus and performance: Banks often consider legacy modernization as an opportunity to add new technology-driven features that may become obsolete in the short term. This lengthens the testing cycle, delaying the modernization process. Banks must ensure a balance between business requirements and technology to avoid the cost of failure.
- Cloud migration: Making banks cloud-ready, an important aspect of legacy modernization, can pose new security and compliance threats. The test strategy must factor in baseline testing for cloud migration.
- Customer experience: Moving business processes to the new platform must not result in friction or compromise customer experience in any way. To this end, business processes that affect experience must be carefully tested in the new platform to identify and fix performance issues.
- Test environment: The lack of test environments and data can increase the cost, time, and effort involved in modernization. Ensuring test environment and data-readiness for core modernization is, therefore, critical.
A leading US bank with global operations planned to modernize its core systems. We helped the bank undertake technology upgradation and data migration. Additionally, we also helped the bank transition business-critical applications to the new platform and improve channel interactions without disrupting customer service.
Efficient quality engineering and testing played a key role in ensuring a trouble-free transition to the new platform, preventing performance issues, and facilitating seamless integration with multiple channels. With this modernization program, the bank achieved the following benefits:
- Zero risk of outage
- 36% improvement in customer satisfaction scores
- 23% cost reduction in adding new features to the mobile banking app
- Seamless integration of multiple banking channels into the new platform
- 22% reduction in maintenance costs
Toward a flawless system
For banks, a flawless, modern system compatible with emerging digital and cloud technologies is an aspirational goal.
Accomplishing this will require banks to carefully deliberate on the modernization objectives and craft a strategy underpinned by robust quality engineering.
Core modernization in banks is extremely complicated but the benefits are well worth the effort—rapid digitalization and a shift to the cloud offer banks the opportunity to explore new avenues of growth. Given the complexity involved, banks must consider partnering with a consulting firm with the requisite domain and technological expertise to ensure hassle-free and successful core modernization.
