Across the United States, thousands of community and regional banks are grappling with a monumental challenge: adapt to the demands of a digital-first world or risk becoming obsolete. Historically, these banks have been the backbone of local economies, providing essential services such as loans to small businesses and serving underbanked communities with a personal touch that larger financial institutions often lack.
However, the landscape is rapidly changing. The rise of stablecoins and FinTech platforms like Square and Block is intensifying the pressure on smaller banks. The recent announcement that stablecoin issuer Circle is seeking a charter for its own national trust bank only adds to the urgency for regional banks to modernize.
The Legacy System Dilemma
Modernization is no small feat, particularly when many banking tech stacks are relics from a bygone era. According to the Office of the Comptroller of the Currency’s (OCC) 2025 Request for Information (RFI) on community bank digitalization, the core issue is not merely financial but architectural. Most community and regional banks are shackled by decades-old core systems, often built on COBOL, which have become barriers to innovation.
These legacy platforms, which manage deposits, loans, and customer accounts, also act as gatekeepers. They dictate which third-party services can be integrated, often through preferred vendor ecosystems. The OCC’s RFI highlights that banks seeking more agile solutions face long development cycles, high integration fees, and sometimes outright technical incompatibility.
“Cores often act as gatekeepers, dictating which third-party services can be deployed through preferred vendor ecosystems.”
The Third-Party Challenge
Despite these hurdles, smaller lenders are not standing still. The “Credit Union Innovation Readiness Index,” a collaboration between PYMNTS Intelligence and Velera, shows that smaller banks are adopting collaborative models to drive innovation. However, a recurring theme in the RFI responses is the disconnect between regulatory expectations and vendor capabilities.
Many banks report that their third-party providers are slow to adopt advanced security features, have delayed integration timelines, or are opaque about customer data management. While partnerships are crucial for modernization, smaller banks often lack the leverage and resources to effectively manage vendor risks.
“On the one hand, smaller banks need these partnerships to modernize. On the other, they may lack the leverage and internal resources to manage vendor risk effectively.”
Human Capital and Governance Issues
Beyond technological constraints, community banks face significant operational challenges. Many are led by individuals with backgrounds in credit or retail rather than technology, creating a leadership gap in making strategic digital decisions. This human capital deficit slows project execution, increases dependency on vendors, and complicates the interpretation of evolving regulatory guidance.
The OCC’s updated bulletin on third-party risk management, released in 2023, underscores the need for banks to adapt to new regulatory landscapes. However, without the right talent, these adaptations can be slow and fraught with risk.
The Future of Financial Access
The digital transformation of community and regional banks is not just about market share or balance sheets. It is about the future of financial access in America, particularly for small and medium-sized businesses (SMBs) that rely on these banks. Despite the challenges, there is optimism.
Digitalization is enabling community banks to modernize operations, expand their reach, and deepen customer relationships. It allows them to compete on customer experience rather than geography alone, reinforcing their role as vital engines for SMBs.
“SMBs don’t just want a bank — they want a partner,” said David Durovy, SVP of transformation at i2c. “And community banks and credit unions are uniquely positioned to be that partner.”
According to research from PYMNTS Intelligence and i2c, SMBs desire fewer fees and better service, areas where community banks can excel compared to larger institutions. As these banks continue to navigate the digital transformation journey, their success will significantly impact the broader financial landscape and the communities they serve.
