Simplification and Modernization of COTS Software 
A Strategic Imperative for Financial Services

Note: The following article has been updated and reprinted here with permission from its author. It was first published by First Derivative in November of 2024. First Derivative, an EPAM company, is recognized as the world’s largest dedicated capital markets consulting firm. First Derivative marries technical expertise with deep capital markets domain knowledge and continues to expand their services to best support a global portfolio of clients.

The financial services landscape is once again undergoing significant transformation, driven by technological advancements, regulatory changes and shifting client expectations. Further complicating matters, global economic uncertainty is placing undue pressure on financial services institutions (FSIs) to operate with unprecedented efficiency. For FSIs operating in this highly competitive environment, application modernization isn’t just beneficial; it’s now a strategic imperative.

Amidst the rush to drive automation, scrap costly services failing to meet expectations, or to simply scale back investment in new technologies, there’s a valid concern that organizations are overlooking a key opportunity to lower the cost of their operations.

As the adage goes, there’s often a failure to see the forest for the trees. In the world of optimization, there’s often a failure by FSIs to view their Commercial Off-The-Shelf (COTS) applications as an opportunity for modernization – likely because those application run so many of their critical functions. However, given the complicated landscape of today’s global financial services industry, COTS application modernization needs to be approached as a critical strategic imperative.

What a Tangled Web We Weave: The Current Landscape of COTS Applications

Many FSIs have long relied on COTS applications for critical functions, including core banking system integration, risk management, compliance and various aspects of the customer experience. As market dynamics change, firms can quickly find themselves constrained by these legacy systems and applications, which, in turn, can hinder agility, increase operational risks and complicate compliance with a continuously evolving set of global regulations.

So, how did we get here?

While very clearly a broad oversimplification, the main driving factor has been the strong shift in consumer expectations driven by the digitization of so many aspects of day-to-day life. Streaming services drove consumers to expect instant access and gratification. Online shopping drove consumers to expect an always open, 24/7 shopping experience complete with instantaneous status updates. And the proliferation of the app-driven mobile experience drove consumers to expect seamless experiences from the convenience of their smartphones. And as this all played out, financial institutions were furiously competing to win over customers by delivering on these rapidly shifting expectations.

In response, the COTS landscape exploded in terms of the depth and variety of services and modularity being offered. Those FSIs who took a best-of-breed approach to composing their services via COTS offerings quickly found themselves saddled with a highly complex and intricately woven framework of offerings.

Which leads us to today’s push to modernize these systems and simplify the complex tapestry so many organizations have patchworked together.

Key Drivers for Modernization

The push to modernize COTS application program suites extends far beyond the desire to bring order and simplicity to a highly complex system. Key motivators for modernization include:

• Regulatory Compliance
  With increasing regulatory scrutiny (and increasingly expensive fines for failing to meet regulatory policy), FSIs must ensure that their systems can adapt to new compliance requirements, and can do so swiftly. Modernized applications can facilitate better data management, reporting and audit capabilities, ensuring firms remain compliant without excessive (and costly) manual intervention.
• Operational Efficiency
  Legacy COTS applications can lead to inefficiencies due to rigid architectures and lack of integration. By modernizing these systems, FSIs can streamline processes, reduce operational costs and improve data accuracy, ultimately enhancing decision-making.
• Customer Experience
  Today’s banking customers demand enhanced digital experiences, including real-time access to data and intuitive interfaces. Modern applications enable FSIs to offer personalized services and quicker responses to customer inquiries, improving overall satisfaction and loyalty while also helping to grow share of wallet.
• Competitive Advantage
  The financial services landscape is increasingly competitive. Those FSIs that modernize their applications can leverage advanced analytics, machine learning and automation to gain insights, manage risks and execute core functions more efficiently than their competitors.

Strategic Approaches to Modernization

In the race to modernize to meet evolving consumer expectations, many banks have moved to cloud-based core banking systems, allowing them to integrate programs from a variety of software as a service (SaaS) vendors. This has resulted in a complex tapestry of commercial applications. As such, the approach each FSI takes to modernization will be as unique as their own program suites. However, from a broad perspective, effective and impactful modernization of COTS applications requires FSIs to consider the following strategies:

• Assess and Identify
  Conduct a comprehensive assessment of existing COTS applications to determine which systems require modernization based on business priorities and risk factors.
• Cloud Integration
  Moving to cloud-based solutions can enhance scalability and flexibility, allowing FSIs to respond rapidly to market changes and customer expectations.
• Embrace an API-First Architecture
  Embracing an API-first approach allows FSIs to integrate existing COTS applications with new technologies, fostering interoperability and enabling quicker innovation.
• Agile Development Practices
  Implementing agile methodologies can accelerate the modernization process, allowing teams to iterate and adapt quickly to evolving requirements.

Whether your organization has woven together a complex, intricate tapestry of programs, or paired together a handful of COTS applications alongside proprietary solutions, the best starting point is to examine the entire program suite in context of the organization’s overall business goals.

Through successful modernization, FSIs can efficiently transition to modern platforms, enhancing flexibility and integration. In doing so, they can position themselves to better navigate regulatory challenges, optimize operational efficiency and elevate customer experiences, positioning themselves for a lasting competitive advantage.

Too Important to Ignore

For FSIs, application modernization is a strategic imperative that cannot be ignored, especially in light of the myriad of challenges 2025 has presented so far. By modernizing their COTS applications, FSIs can improve operational efficiency, enhance customer experiences and maintain regulatory compliance, all while positioning themselves for future growth in a rapidly changing environment.

The path to modernization may present challenges, but the benefits far outweigh the risks and will ultimately pave the way for a more agile, competitive future.