Compliance-First Approach to Core Banking Modernization

Banks today face a quietly impossible position: they must modernize urgently, yet the very systems keeping them running turn change into a high-stakes decision. Legacy technology, regulatory demands and financial constraints pull in different directions – and most institutions are caught in the middle. While core banking modernization is essential to meet innovation needs and rising customer expectations, many remain deeply dependent on aging infrastructure – with 55% of banks still citing legacy systems as a key barrier to digital transformation. Drawing on insights from Reiz experts, this article explores how modernization is being reshaped by complexity, compliance and execution reality.

The Forces Reshaping Core Banking Modernization

Most established banks still operate within fragmented legacy architectures built up over decades, spanning core banking, payments and risk systems connected through layered integrations and workarounds. While stable in day-to-day operations, these environments were not designed for real-time data, flexibility or rapid innovation. A 2025 Baringa retail banking study found that 67% of banks believe their entire technology stack would fail if the legacy system stopped working, highlighting deep operational dependency.

Regulatory pressure is also intensifying through frameworks such as PSD2, DORA and AML, alongside growing expectations for security, governance and operational resilience. Even minor infrastructure changes now require extensive validation and risk oversight. Accenture’s 2026 Pulse of Change survey shows that while 8 in 10 retail banking CTOs report accelerated technology change, only 28% feel prepared for the disruption, revealing a widening readiness gap.

Customer expectations continue to rise in parallel, with digital-first services, instant payments, personalization and seamless omnichannel experiences now considered standard. More than one in three customers have switched banks in the past five years (Baringa, 2025). However, less than 30% of IT spending is allocated to innovation and growth, limiting response capacity. As a result, 68% of banking executives report that current technology architecture actively prevents effective customer service (Accenture, 2026).

Cost becomes the final pressure point. Accenture reports that over the past 15 years, banking technology costs have grown nearly four times faster than revenue, widening the gap between operational requirements and financial capacity. Globally, banks account for around $650 billion of the $4 trillion spent annually on IT and modernization (McKinsey, 2024), with most of this investment absorbed simply to maintain legacy environments.

Why Core Banking Modernization Initiatives Fail

Despite clear pressure to modernize, many programs struggle due to structural misconceptions. Working closely with the banking sector, Key Account Manager Julija Šurnienė observes that modernization is often treated as an IT project rather than a broader business transformation – leading to unclear target architectures, overemphasis on technology, weak data foundations and attempts to change everything at once.

“New technology alone does not resolve legacy challenges – it simply scales existing organizational strengths and weaknesses” – J.Šurnienė adds.

How Successful Banking Transformation Balances Innovation and Compliance

Despite its complexity, core banking modernization can follow a different approach. As Julija notes, “full replacement and building entirely from scratch may still work in isolated areas such as new digital divisions. In most cases, however, modernization must be incremental due to the scale and criticality of legacy environments.”

Over the past decade, banking IT landscapes have expanded significantly, with application volumes rising by 68% and vendor ecosystems by around 60%, deepening silos and integration complexity. In this context, modernization must focus not only on separating capabilities incrementally, but also on strengthening integration across the broader architecture rather than adding further fragmentation.

Common approaches include building API layers, adopting microservices architectures, migrating to cloud-ready infrastructure and progressively extracting functions from monolithic systems. This reduces dependency on legacy systems while enabling continuous delivery of new capabilities without disrupting core operations.

Embedding Compliance Early

In banking, architecture decisions are inseparable from regulatory accountability, requiring auditability, traceability and strong governance. Compliance is therefore embedded from the outset of modernization initiatives as part of the operating model, with close collaboration between delivery and compliance teams.

As Reiz’s delivery team explains, regulatory and technical changes are typically planned in advance and integrated into delivery rather than treated as disruptions. Even when additional challenges arise, the delivery approach is designed to absorb them without impacting stability, ensuring that planned outcomes are achieved seamlessly.

Value-Driven Modernization

Given financial constraints, core banking modernization programs must target areas that both reduce operational costs and unlock new capabilities. Integration layers, data platforms and process automation typically deliver the highest return, enabling faster product development, improved insights and more efficient regulatory reporting.

According to Julija Šurnienė, “mature institutions treat modernization as a business transformation – improving current efficiency while enabling new revenue models and long-term scalability.” This helps reduce dependency on legacy systems as the primary driver of IT spending.

Transformation Beyond Technology

Even when modernization is done correctly, one critical factor is often underestimated: the people driving it. As Reiz’s delivery team notes, success depends on collaboration and shared understanding across teams, extending beyond internal stakeholders to external vendors and system providers. Alignment across all parties ensures consistency in delivery and clarity in transformation objectives.

Core Banking Modernization in the Age of AI

Artificial intelligence has moved beyond experimentation into production use in banking, though its application remains selective. The strongest use cases include fraud detection, risk modeling, customer service automation, personalization and compliance-related document analysis, where efficiency gains can be achieved without structural disruption.

Generative AI introduces both opportunity and risk. 42% of banking executives believe AI is advancing faster than their risk and compliance frameworks can support. At the same time, around a quarter of institutions scaling AI report EBIT or profit uplifts above 5%, showing that disciplined adoption delivers measurable value (Accenture, 2026).

As J.Šurnienė observes, the guiding principle remains simple: “test widely, deploy responsibly. AI is not a standalone transformation layer, but a capability that must operate within the same governance, integration and compliance constraints as broader modernization.”

Choosing the Right Partner for Your Banking Transformation

Successful modernization depends not only on technology and delivery, but on the quality of the partnership behind it. In environments defined by regulatory pressure, legacy complexity and operational risk, vendors must act as long-term strategic collaborators.

Effective partnerships are built on a deep understanding of banking and regulation, experience with mission-critical systems, transparent delivery, flexibility, strong security standards and long-term value focus. Trust emerges when partners understand strategic direction, identify risks early and ensure solutions remain relevant beyond immediate project scope. Consistency across delivery, risk awareness and strategic alignment is what enables bank relationships with vendors to evolve into long-term engagements.

Banking modernization is not a choice between innovation and compliance – the most successful institutions treat them as co-evolving priorities. Through incremental transformation, embedded regulatory alignment and value-driven investment, banks can modernize their technology landscape while maintaining stability and compliance.

With only 2% of banks reporting no intention of moving away from legacy systems, the direction of change is already clear. The institutions that lead will not necessarily be those moving fastest, but those modernizing with the greatest discipline. Success will depend on evolving their technology alongside their approaches to risk, regulation and change itself.