How to modernize legacy banking systems in Latin America

Latin America’s banking sector is undergoing a rapid transformation. While the region’s fintech ecosystem has flourished—boasting over 30% of the world’s fintech companies, according to the Inter-American Development Bank—many traditional banks struggle to articulate the business case for core modernization.

With over 50% of the adult population still unbanked or underbanked, according to the World Bank, the opportunity to modernize is not just a priority—it’s a necessity. Rapid fintech innovation and real-time payments are reshaping customer expectations. Yet, outdated legacy systems hinder banks from seizing opportunities to address financial inclusion and unlock new growth.

The Urgency for Core Modernization in Latin America

While digital banking usage in Latin America has grown by 40% since 2020, much of the infrastructure remains outdated. For example, a 2023 study by Finnovista highlights that up to 60% of core banking systems in the region still rely on legacy technology that is costly, inefficient, and vulnerable to risks.

Additionally, real-time payments have surged, with Brazil’s PIX system becoming a model for rapid adoption across the region. In its first two years, PIX recorded more than 26 billion transactions, according to the Central Bank of Brazil. This demonstrates the region’s appetite for innovation and underscores the need for banks to adopt modern, agile technology stacks to compete.

Modernization Challenges in the Region

1. Financial Inclusion as a Growth Opportunity: With over 200 million unbanked adults in Latin America, modernization enables banks to deploy customer-centric products, such as mobile-first accounts or embedded finance solutions, to serve this untapped market.

2. Regulatory Pressures: Regulators across Latin America are introducing frameworks for open banking, particularly in Brazil and Mexico. These initiatives aim to increase competition and pressure traditional banks to modernize systems to enable API-driven data sharing.

3. Tech-Business Alignment: The region’s banks are often caught between balancing technical priorities like cost and risk and business objectives like growth and efficiency. Latin American fintechs, with their agile stacks, are launching products 3x faster than traditional banks, eroding market share.

How to Reduce Core Banking Modernization Costs

Rather than seeing modernization as a daunting, “big bang” change, banks in Latin America can take an incremental and holistic approach:

• Greenfield Models: Brazil’s Nubank, the largest neobank in the region, exemplifies this approach by launching new products like credit cards on modern platforms while gradually migrating other services.

• Iterative Improvements: By focusing on specific product lines, like Buy Now, Pay Later (BNPL) or small business lending, banks can modernize incrementally to minimize disruption and prove ROI.

Data: The Foundation for Personalization

In Latin America, 74% of consumers say personalized financial solutions influence loyalty (PwC). Yet, many banks lack access to customer data due to siloed and fragmented legacy systems. Modern, API-first architectures can help banks harness data to:

• Offer tailored financial products, such as microloans or savings plans.

• Improve onboarding experiences, as seen with fintechs offering seamless digital wallets across Latin America.

The Business Case for Core Modernization

Latin American banks risk losing competitive ground to fintechs unless they adopt systems that enable:

• Faster Time-to-Market (TTM): Traditional banks in the region take up to 12 months to launch a new product, compared to 3-6 months for fintechs.

• Customer Retention: Churn rates of up to 20% in traditional banks highlight the need for personalized, frictionless experiences.

• Cost Reduction: Outdated legacy systems cost regional banks billions annually in maintenance, compliance, and inefficiencies.

Key Takeaways for Latin American Banks

1. Financial Inclusion Is the Future: Addressing unbanked populations represents both a social responsibility and a growth opportunity.

2. Leverage Real-Time Payments: Systems like PIX and Mexico’s CoDi demonstrate how core modernization drives adoption and revenue.

3. Modernize with Agility: Incremental approaches minimize risk and allow banks to scale.

4. Invest in Data: Unlocking customer insights is essential to competing with fintechs and building loyalty.

By embracing core banking modernization, Latin American banks can transform challenges into opportunities—driving financial inclusion, enhancing customer experiences, and staying competitive in a rapidly evolving landscape. The fintech revolution, real-time payments, and regulatory shifts demand a more agile, data-driven approach to banking. By prioritizing incremental modernization strategies, banks can reduce risk, improve time-to-market, and deliver the personalized financial solutions that today’s consumers expect. The path forward is clear: those who invest in modern, API-first architectures will unlock new growth opportunities and solidify their position in the future of Latin American banking.