Adapting to thrive: How regional and community banks are balancing modernization with a shifting regulatory landscape
In today’s uncertain economic environment, the banking landscape is evolving faster than ever. Rapidly changing customer expectations prioritize convenience and digital experiences, as traditional banks increasingly compete with fintech providers in core services like lending and payments. At the same time, a significant number of banking customers still value the ability to walk into a branch and interact directly with a human who can provide advice and address their needs.
To meet these shifting demands, regional and community banks must embrace tech transformation, including AI, while navigating regulatory changes and competing with both larger institutions and fintechs. Modernization is key to adapting in this volatile environment.
Embracing tech-driven business transformation
Technological change in the financial services industry has accelerated at an unprecedented pace. “Twenty years ago, modernization was about replacing old tech: migrating from green screen loan origination systems, digitizing documents, and implementing CRMs for the first time,” says David Demsko, Director, Baringa Partners. “Today, it’s about creating an environment that can adapt.”
As operating workflows evolve, legacy systems make it difficult for financial institutions to keep up. Implementing modern SaaS solutions, payments to go, and other emerging technology demands a modern tech stack. At the same time, Finastra’s Radha Suvarna, Chief Product Officer, Payments, notes that while technology may be the driver, modernization is about business transformation.
For example, he points out that many middle-market banks are shifting their business models to prioritize fee-based income, as well as focusing on industry-specific verticals and niches such as property management and healthcare. Tech transformation and embedded API capabilities are essential for serving these verticals. “Absent a modern tech stack, you can’t compete for that revenue,” says Suvarna.
Modernization is also critical to implementing AI in banking systems. From underwriting to customer support, AI enables regional and community banks to streamline workflows and improve efficiency. Banks must invest in modern technology and data infrastructure to support these capabilities.
However, Demsko cautions that banks make a critical mistake when they pursue technology without a clear strategy. Establishing a business plan that prioritizes growth, revenue and profits is key to making the case for modernization investments, says Michael Glotz, Chief Executive Officer and Managing Partner, SRA Consulting: “If you haven’t made the business case, you have a lot of wind in your face. Sell the top line and the bottom line, not just the tech investment.”
Finally, Demsko emphasizes that modernization is a long-term commitment. “Modernization is very rarely a big-bang event,” he says. Rather, it’s a process of making incremental improvements toward a North Star vision that reflects the organization’s business goals and strategic priorities. “Folks who have the most success are relentlessly focused on a small number of high-value changes,” he adds.
Navigating an evolving regulatory environment
As financial institutions navigate the modernization imperative, they also face an unpredictable and ever-shifting regulatory landscape. As Finastra CEO Chris Walters notes, regional and community banks are in an especially challenging position: due to their critical role in the U.S. financial system and economy, regulators are highly focused on smaller and midsize banks. At the same time, these institutions often lack the resources to spend on compliance and cybersecurity as larger institutions. “The degree of vigilance and investment required has really changed,” says Walters.
One area of regulatory change that presents both challenges and opportunities to banks is the adoption of digital assets. According to Matthew Thompson, Principal Compliance Counselor at Finastra, banks need to be familiar with digital currency products and services to drive growth and remain competitive as the space evolves. In addition, banks’ expertise and familiarity with regulatory compliance provides them with a substantial advantage over non-bank competitors who may not be as well-versed in navigating regulatory rules and standards.
Recent regulatory developments with which regional and community banks should familiarize themselves include the federal GENIUS Act governing payment stablecoins and UCC Article 12 and Revised Article 9, uniform state laws governing controllable electronic records and secured transactions in digital assets. These frameworks aim to apply familiar legal concepts and frameworks against new technology to help demystify cryptocurrency and tokenization, as well as increase clarity, trust, and adoption of digital assets.
The Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act defines payment stablecoins as:
- Digital assets for payment or settlement use
- Tied on 1:1 basis to U.S. Dollar or liquid asset reserves
- Redeemable at par
- Non-interest bearing
- Not a national currency, bank deposit, or security
- Not backed by full faith and credit or covered by deposit or share insurance
The GENIUS Act also establishes qualifications for entities that can produce or issue stablecoins, including policies around reserves and disclosures.
As digital assets continue to proliferate, banks can include crypto assets, tokenized receivables, and digital payment rights as eligible loan collateral. They must also adopt capabilities such as wallet and key management and control documentation to comply with UCC Article 12 requirements for controllable electronic records.
Partnering with third-party experts that understand best practices around compliance can help regional and community banks establish a solid governance framework to guide their modernization and tech transformation journeys. In addition, experienced partners can provide perspective and insights around AI governance, where new developments are emerging rapidly and regulators are still determining how to conduct oversight and issue guidance.
As regional and community banks navigate a dynamic and unpredictable business environment, they must integrate modernization with regulatory compliance. Successful technology transformation depends on a strong foundation of governance and risk management. Financial institutions that align their modernization efforts with concrete business goals while prioritizing security and compliance will be better positioned to thrive in today’s challenging landscape.
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