Banks spend nearly 70% of their IT budgets just to keep outdated systems running, leaving little room for innovation. This inefficiency costs global banks $36.7 billion annually, and spending is projected to reach $57 billion by 2028. The modernization decisions banks make today will shape their competitiveness tomorrow.
Legacy technology continues to be a top concern for 53% of banking executives. The effects are felt across the board: delayed product launches, rising maintenance costs, and a shrinking pool of specialized talent. This blog explores what “good enough” infrastructure really costs—and offers clear, proven strategies to move forward.
The Visible Financial Burden of Legacy Systems
1. Annual Maintenance Costs
Maintaining outdated banking infrastructure consumes more than half (55%) of most IT budgets. In 2022 alone, global financial institutions spent $36.7 billion on legacy payment systems, a number expected to hit $57 billion by 2028, according to IDC Financial Insights. Deloitte reports that only 19% of budgets go toward innovation. McKinsey estimates that just 5–10 cents of every tech dollar delivers actual business value, with the rest spent on maintenance and patching.
2. Specialized Talent Costs
Legacy systems like COBOL (still used by 43% of U.S. banks) are increasingly expensive to maintain. Banks often pay 2–3 times more for COBOL engineers than for those working on modern stacks—up to $250/hour versus $90/hour. Regions such as the Middle East and the Caribbean, where outdated proprietary platforms still dominate, are especially vulnerable due to limited talent availability.
3. Cybersecurity Risks
Legacy infrastructure increases vulnerability to cyberattacks. IBM’s Cost of a Data Breach Report reveals that financial sector breaches now cost $6.08 million on average—above the cross-industry average of $4.88 million. Banks with outdated systems face three times more attacks, and threats have more than doubled since the pandemic began.
Beyond the Balance Sheet: Hidden Operational Costs
- Obsolete Vendor Dependency
Many outdated core system vendors are phasing out products without viable upgrades or are being acquired, leaving banks stuck with unsupported technology. Vendor exits can leave institutions scrambling, especially if key knowledge is lost along the way. - Product Launch Delays
Traditional banks often take between 6 to 18 months to bring new products to market. In contrast, digital-first competitors can launch similar offerings in just 2 to 3 months, highlighting a significant time-to-market gap.
This delay not only hampers competitiveness but also leads to resource inefficiencies. A study by McKinsey indicates that despite increasing technology investments, many banks struggle to achieve the desired productivity gains, leading to challenges in realizing value from their tech spending. - Employee Productivity Drain
Engineers at legacy-bound banks spend up to 25 hours per week managing patches and outdated workflows. This not only drains productivity but also increases burnout and turnover. - The Hidden Drain of Data Integration
Siloed systems hinder the extraction of insights and the ability to act on data. McKinsey reports that up to 70% of software used by Fortune 500 companies was developed over two decades ago, indicating a heavy reliance on legacy systems. In one case, a large European bank allocated 70% of its IT capacity to maintaining these outdated systems. This fragmentation stalls strategic initiatives like API-driven finance and fintech partnerships, as outdated infrastructure limits agility and innovation.
Competing in a Digital-First World: Yes, We Are Talking About Gen-Z
Gen Z is redefining what great banking looks like.
Raised in a world of instant apps and personalized digital journeys, they expect onboarding to be seamless, mobile-first, and paper-free. Yet many traditional banks still rely on legacy systems that demand manual steps, in-branch visits, and lengthy paperwork.
The result? Friction, frustration, and drop-offs. Digital-native competitors, on the other hand, can sign up new customers in minutes, earning loyalty before traditional banks even get a chance.
Modernization Pays Off
Banks that embrace modernization outperform peers in revenue, speed, and efficiency. McKinsey reports that only half of banks globally cover their cost of equity, and 51% fall below that threshold. Accenture warns that banks slow to adopt next-gen payment systems risk losing up to $89 billion by 2025. On the flip side, banks using modern payment platforms see a 42% increase in payment-related revenue and can launch products 90% faster.
Choosing the Right Path to Modernization
System upgrades are strategic decisions—not just IT projects. Banks typically follow one of three approaches:
Progressive Modernization: About 40% of global banks take this phased route, running modern systems alongside legacy ones to reduce risk.
Total Replacement: Chosen by 13% of banks, this approach is ideal when outdated systems severely limit growth and flexibility.
Hybrid Modernization: Combining legacy system strengths with modular, cloud-based upgrades, this model can reduce infrastructure costs by up to 30%.
Banks that own their core system’s source code can also pursue re-architecture—preserving key functions while enabling gradual modernization and reducing vendor lock-in.
Conclusion
Every dollar spent maintaining a legacy system is a dollar not invested in growth. Outdated systems drain budgets, delay innovation, and create security risks. Meanwhile, modern banks move faster and earn more.
Whether through progressive upgrades, full replacement, or a hybrid model, modernization is not just possible. It’s profitable.
The future belongs to banks that act now.
