The financial landscape in Latin America is undergoing a major transformation. Consumers now expect seamless, digital-first experiences, while fintechs and digital-native banks continue to disrupt the industry with agile, technology-driven services. For traditional financial institutions (FIs) still operating on outdated legacy core banking systems, the pressure to modernize has never been greater.

Yet, core modernization is a complex process. It requires careful planning, investment, and strategic execution to avoid high costs, security risks, and operational disruptions. Banks that fail to modernize risk losing customers, increasing operational inefficiencies, and missing out on new revenue opportunities. In contrast, those that embrace modernization can improve agility, reduce costs, and unlock new growth avenues.

Here’s a look at why core modernization is crucial for Latin American banks and how they can approach it strategically.

Defining the Need for Core Modernization

Before embarking on a modernization journey, financial institutions must clearly define their objectives and ensure alignment across the organization. Leadership buy-in is critical for success, as misaligned motivations can derail the entire process.

A 2023 study of banking executives across six Latin American countries found that 98% of respondents have a digital transformation strategy, with 50% reporting advanced implementation (Economist Intelligence Unit). This demonstrates a widespread recognition of the need to modernize, yet many banks are still held back by outdated systems that limit their digital capabilities.

The Cost of Doing Nothing: Financial and Competitive Risks

While the upfront investment required for core modernization may seem daunting, failing to modernize comes with hidden costs. Relying on outdated core systems leads to inefficiencies, higher maintenance costs, and a lack of scalability.

A study by IDC Financial Insights estimated that banks worldwide spent $36.7 billion in 2022 maintaining outdated payment systems, with this figure projected to rise to $57 billion by 2028. Additionally, research from McKinsey found that operating costs for banks using legacy systems were up to 10 times higher than those leveraging next-generation core solutions.

For Latin American banks, where digital adoption is growing rapidly, outdated technology is a major obstacle to competing with fintech challengers. Institutions that fail to modernize risk being left behind in a market that increasingly prioritizes speed, security, and convenience.

Incremental vs. Full-Scale Core Modernization: A Strategic Approach

Core modernization doesn’t have to be an all-or-nothing proposition. Banks can adopt an incremental approach, gradually modernizing their systems in phases to reduce risk and manage costs.

A phased approach enables banks to implement targeted upgrades, evaluate performance, and adjust their strategy as needed. This method allows for minimal disruption to daily operations while ensuring a smoother transition.

One popular strategy is the sidecar core approach, where a modern, cloud-native core runs alongside the legacy system. Initially, the sidecar core handles a limited set of services, such as digital-only banking products or new customer segments. As confidence in the new system grows, additional services and customers are migrated, eventually phasing out the legacy system entirely.

According to IDC, 40% of global banks will adopt sidecar core banking strategies by 2026 due to their flexibility and lower risk. For Latin American banks looking to balance innovation with stability, this approach presents a viable path forward.

The Benefits of a Modern Core Banking System

Banks that successfully modernize their core systems can unlock numerous advantages, including:

• Greater Agility – Ability to quickly adapt to changing market demands and launch new products faster.

• Cost Efficiency – Reduced maintenance and operational costs compared to outdated legacy systems.

• Enhanced Customer Experience – More seamless, personalized, and digital-first banking experiences.

• Stronger Security – Modern security frameworks that reduce fraud and cyber threats.

• New Revenue Streams – Ability to leverage Banking-as-a-Service (BaaS) and embedded finance opportunities.

Conclusion: The Time to Modernize is Now

The future of banking in Latin America is digital. Institutions that embrace core modernization will not only survive but thrive in an increasingly competitive landscape. By strategically approaching modernization—whether through full transformation or incremental updates—banks can position themselves for long-term success, drive innovation, and better serve the evolving needs of their customers.

For Latin American banks, the choice is clear: evolve or risk falling behind. The time to act is now. 

Contact us to learn how to get started on the path to core modernization with Galileo.