The banking boom: Is digital innovation just a gloss over old systems?

By Gloria Methri

Despite the banking sector’s aggressive push towards digital transformation, a critical oversight threatens long-term growth: the neglect of legacy system upgrades. While financial institutions focus on enhancing front-end digital experiences, outdated core infrastructure could become a major roadblock to scalability, cybersecurity, and regulatory compliance.

The 2025 Retail Banking Trends and Priorities Report, published by the Digital Banking Report, provides a comprehensive look into the evolving financial landscape. It highlights key industry priorities, emerging challenges, and the technological shifts shaping the future of banking.

According to the report, 52% of financial institutions list enhancing digital experiences as their top priority. Banks and credit unions are rapidly adopting mobile-first strategies, AI-driven customer engagement, and real-time payment capabilities to meet rising consumer expectations. However, only 25% of institutions are focusing on upgrading core banking infrastructure, creating a gap that could hinder long-term sustainability.

Legacy System Neglect: A Ticking Time Bomb?

The report highlights a concerning trend: while banks are modernising customer-facing technologies, most continue to operate on outdated core systems. Credit unions appear to be an exception, with 45% prioritising legacy system upgrades, suggesting a more sustainable approach to digital transformation.

The Shift to Hybrid Banking Models

Contrary to the assumption that digital banking would make physical branches obsolete, 35% of financial institutions plan to expand their branch networks. Credit unions lead the charge, with 61% focusing on physical expansion. This demonstrates that a hybrid approach—blending digital services with in-person banking—remains crucial for customer engagement.

The Rise of AI and Real-Time Payments

Artificial intelligence is becoming a core element of banking, moving beyond fraud detection (33% adoption) to customer service chatbots (28%) and even content creation (25%). Additionally, 62% of banks have implemented real-time payments, yet only 40% of credit unions have followed suit, highlighting the continued disparity in technological adoption.

FinTech Partnerships Accelerate Innovation

With 64% of financial institutions partnering with FinTech firms, banks are increasingly relying on third-party solutions for digital account opening (49%), financial wellness services (41%), and security management (29%). These partnerships reflect a shift towards a more modular, API-driven banking ecosystem.

2025 Growth Strategies: Customer Acquisition Over Retention

Financial institutions are prioritising customer acquisition (45%) over retention (12%), signalling an aggressive growth strategy. While growing existing relationships remains a focus (23%), the shift away from retention efforts suggests that banks see greater value in expanding their customer base rather than deepening current engagements.

The report’s 2030 projections indicate that generative AI will drive hyper-personalised banking experiences, with 80% of institutions expecting AI-led customer interactions. Additionally, embedded banking and open finance are set to redefine traditional financial services, with 70% of executives predicting that over half of all transactions will occur through non-bank channels like Apple Pay and Google Pay.

While banks and credit unions are rapidly digitising their services, the reluctance to modernise core infrastructure raises critical concerns. Institutions that fail to upgrade their legacy systems may struggle with scalability, cybersecurity risks, and regulatory compliance in an increasingly digital-first world. As 2025 unfolds, the banking sector must strike a balance between front-end innovation and back-end resilience to ensure sustainable growth in the years to come.