Three-Quarters of Banks Face Digital Banking Infrastructure Issues

The banking industry is experiencing a seismic shift as agile, digital-native FinTechs capture an ever-growing share of the market. Burdened by outdated technology, traditional financial institutions face mounting challenges in delivering modern digital services. The growing dominance of FinTechs — securing nearly half of all new account openings — highlights the urgency for banks to modernize their infrastructure.

With consumer expectations rapidly evolving toward seamless digital experiences, banks must navigate the high costs and complexities of updating their core systems. Exploring incremental modernization through application programming interfaces (APIs) may offer a viable path forward, enabling banks to enhance their digital capabilities and remain relevant in an increasingly competitive landscape.

A recent PYMNTS Intelligence Report, “Core Strength: FIs Must Modernize to Meet the FinTech Challenge,” in collaboration with Galileo, highlights the urgent need for traditional financial institutions to overhaul their outdated systems to keep pace with digital-native competitors. The report reveals that 75% of banks struggle with implementing new digital solutions due to their legacy infrastructure, underscoring the critical nature of modernization efforts. As FinTechs continue to capture a growing market share, banks face mounting pressure to adopt agile technologies and innovative approaches.

FinTechs Are Outpacing Traditional Banks

FinTechs and digital banks have captured 47% of new account openings in the first half of 2023, a notable increase from 36% in 2020. This surge highlights their growing dominance in the market. A sizable portion of these customers — 41% — use digital-only banks for their primary banking and credit card needs, signaling a shift away from traditional financial institutions. The swift growth of FinTechs underlines the urgent need for banks to enhance their digital offerings to avoid losing more customers.

Legacy Systems Are a Major Barrier

Legacy core banking systems hinder traditional banks’ delivery of modern digital services. According to the report, 75% of banks struggle to implement new payment solutions due to outdated infrastructure. Additionally, 59% of bankers see their legacy systems as a major business challenge, describing them as a “spaghetti” of interconnected but antiquated technologies. This complexity and obsolescence make system upgrades costly and difficult.

APIs Offer a Solution for Incremental Modernization

APIs are emerging as a practical solution for modernizing banking infrastructure without complete overhauls. Nearly 47% of financial institutions are pursuing incremental core upgrades using APIs, which allow for gradual improvements and integration of new functionalities.

This method contrasts with the 13% of banks opting for full-core system replacements, highlighting the more manageable and less risky nature of API-driven updates. For instance, Deutsche Bank’s implementation of an API-accessible payments orchestration layer illustrates how such upgrades can streamline operations and enhance digital service offerings.

As FinTechs continue to disrupt the banking sector, traditional financial institutions must prioritize updating their core systems. By adopting incremental modernization through APIs, banks can improve their digital capabilities and remain competitive in a rapidly evolving landscape.