In 1975, Businessweek ran a story identifying the ways that technology would reshape the workplace. Leaders from Xerox and IBM correctly predicted that by 1995, offices would have an integrated network of personal computers at each desk and electronic filing systems. The article now regularly circulates on the internet as an entertaining time capsule of office technology in the 1970s, when automation had just started to emerge.

Really, however, the piece was an in-depth analysis of new technologies, aimed at helping large office-using businesses navigate the “onrushing of new hardware and procedures,” and it investigated real-world challenges like speed of adoption, cost control, transition and employee training. Although technology has advanced well beyond the desktop computer (not even IBM could predict the technology of 2023), these same complexities and challenges are just as relevant for businesses today as they were in the 1970s.

Take payments, for example. This industry is currently experiencing that same onrush of new systems. Financial institutions (FIs) are grappling with how to modernize and meet customers’ ever-evolving expectations, and many are finding the process to be arduous and complex.

Nearly five decades later, FIs are looking for a new guide. While there are many options, progressive modernization is a pathway financial institutions should seriously consider to upgrade their tech stack and meet their goals.

Migrating to the cloud

Technological modernization and the cloud are synonymous — especially in 2023. Cloud-based technology processes payments, opens artificial-intelligence and machine-learning capabilities and improves flexibility, giving businesses the opportunity to pursue partnerships, expand market share or simply dedicate resources to more strategic business functions. Migrating systems to the cloud is the pathway to digital maturity, and it is an important step if companies want to adopt current innovations and prepare systems for future demands.

FIs already seem to understand the tremendous benefits of the cloud, with a report from IBM showing that 91% are using or planning to use cloud-based services in some capacity. The same report, however, found that a stark 9% of organizations have transitioned mission-critical workloads, and IDC’s Worldwide Industry Cloudpath Survey found that only 25% of organizations had a cloud-optimized payments strategy.

Although there’s a consensus among FIs that cloud infrastructure is part of the way forward, many are still struggling with how to get there.

Ultimately, there are three strategies to get started. The most aggressive, what we like to call “the heart transplant,” is a complete replacement of legacy technology with cloud software. This is a risky and disruptive process and should only be done with careful planning. The next option is to create a standalone tech stack built from the ground up on a cloud platform. This is a clean-slate approach that allows FIs to test a parallel program and partners before integrating it into the organization. Although this is less risky and disruptive, it is also more expensive and not a viable option for most banks. The third method is “progressive modernization,” where technology is moved onto the cloud in a phased process.

Making the case for progressive modernization

Though perhaps a misperception, FIs don’t need to have an immediate and reflexive response to innovation, like “the heart transplant.” Rather, a strategy of measured calculation to transition legacy technology to a cloud-based platform should be considered. Through progressive modernization, FIs can combine trusted processes with new functionalities, limiting risk exposure and disruption as the organization transitions.

Research from McKinsey shows that progressive modernization is the best option for mid-cap banks, in particular. This process upgrades the core system and unlocks advanced capabilities, all in a condensed timeline and at a substantial discount. By McKinsey’s estimate, progressive modernization needs a financial investment of only 20% to 30% the cost of a full core-modernization plan. This is a tremendous benefit. In the past, FIs have overwhelmingly identified cost as the top challenge for modernizing IT infrastructure.

A recent study from IDC exposed a similar set of benefits. Financial institutions that implemented a phased transition to a cloud platform reduced disruption to business function and extended the life of the legacy system, and they reduced the financial impact by spreading the cost across smaller phases. Further, research from IBM shows that a progressive modernization approach supports internal trust by creating a secure platform and meeting regulatory requirements without disrupting core processes.

As we consider the competitive landscape in 2023, there is no doubt cloud-based infrastructure is vital to modernizing payment technology, future-proofing the tech stack and gaining competitive ground in an increasingly crowded payments market. At the end of the day, adopting new technologies will always seem like a daunting process, whether you are operating a company in 1975 or 2023. But with progressive modernization, there’s a painless and straightforward pathway for FIs.

John Mitchell is CEO and co-founder of global payments and banking infrastructure provider Episode Six and an expert in the payments industry with decades of experience in leading and growing startups. Prior to Episode Six, he served as CEO of Rev Worldwide, as well as the primary architect and strategist of Netspend Corp.’s early sales and distribution strategy.