- Growth & Innovation, Technology
Adapting to uncertainty: How community banks can manage costs, competition and compliance
- Integrating scalable middleware to add modern solutions within existing systems is one key step.
Share
Community banks have long prided themselves on fostering close community relationships and delivering personalized service. However, the financial landscape they operate is rapidly shifting.
The latest Conference of State Bank Supervisors (CSBS) survey highlights a range of external pressures, including deposit competition, rising technology costs and regulatory complexity, all of which pose significant threats to profitability.
The cost of retaining deposits has surged as interest rates rose and aren’t likely to come down as fast as once anticipated, and while existing loans have been slower to reprice. This squeeze has strained net interest margins and forced many banks to reassess their strategies. With 84% of survey respondents naming core deposit growth as a critical external risk, banks must balance aggressive competition for deposits with prudent cost management.
Amid these challenges, banks taking steps to modernize their technology infrastructure are achieving success. Rather than taking on the operational and financial risks of replacing legacy core systems, community banks are increasingly adopting tools like middleware that allow them to integrate modern solutions with existing systems.
For community banks, technological advancement is no longer optional. The CSBS survey reveals that 56% of respondents view new technology adoption as essential for meeting customer expectations, yet high implementation costs and operational complexity remain barriers. A strategic approach to integration can bridge this gap, allowing institutions to add new capabilities without disruptive core conversions.
Consider the challenge of integrating digital lending platforms. Without middleware, banks often face lengthy and expensive development cycles to connect third-party fintech solutions to their core systems. Strategic integration approaches simplify this process, enabling banks to deploy modern tools faster and more cost-effectively. This is particularly important given that nearly 60% of banks cited loan process modernization as a strategic priority. By automating workflows such as underwriting, document management and approval processes, banks can reduce errors, improve efficiency, and enhance customer experiences.
Deposit competition remains fierce, as more than 80% of banks cite bank market competition as the largest challenge to attracting and retaining core deposits. The rapid rise in interest rates has made it harder for banks to retain low-cost deposits, forcing them to offer higher rates to stay competitive. At the same time, larger institutions, credit unions, and fintechs continue to gain market share by offering innovative digital services.
A centralized integration approach allows community banks to compete by enabling quick implementation of fintech solutions that enhance the customer experience. Whether it’s mobile banking, real-time payments, or savings apps, streamlining the integration of these solutions directly to the bank’s core system without expensive custom development gives banks the agility to stay competitive in a landscape where digital-first offerings increasingly drive deposit decisions.
Additionally, serving niche industries can provide an avenue for growth. According to a banker perspective highlighted in the survey, some institutions have mitigated pricing pressures by focusing on industry-specific accounts that require more compliance work but face less competitive pricing. Implementing scalable integration technology like middleware makes it easier for banks to support such specialized offerings, further differentiating themselves in the market.
Cybersecurity and regulatory scrutiny remain significant concerns for community banks. In fact, nearly 96% of banks cited cybersecurity as a very important internal risk, and it remains one of the biggest obstacles to adopting new technology. With rising expectations around data security and auditability, banks need solutions that not only streamline operations but also enhance compliance.
Simplifying and centralizing the management of data exchanges between core systems and third-party providers can help mitigate these risks. By ensuring that integrations are secure and auditable, banks can better protect sensitive customer information and maintain compliance with evolving regulations. This is particularly important given the growing reliance on fintech partnerships, which, while valuable, add layers of complexity to data management.
Despite the headwinds, community banks have an opportunity to turn their challenges into a competitive advantage. Investing in integration technology not only helps reduce costs and improve efficiency but also enhances flexibility—allowing banks to pivot quickly as market conditions change. This adaptability is especially important given the likelihood of continued interest rate volatility and regulatory pressure throughout 2025.
Moreover, fintech partnerships are becoming increasingly important for banks looking to expand their digital offerings, with nearly one-third of banks stating that they see promising opportunities with these providers over the next five years. By integrating best-in-class fintech solutions without overhauling their core systems, banks can offer the innovative services customers demand while controlling costs. This approach allows community banks to strengthen these partnerships and enhance their value proposition.
The CSBS survey underscores the difficult road ahead for community banks, but it also highlights areas where the right technology can drive meaningful improvements. By focusing on streamlined integration and modernization, these institutions can address operational challenges while continuing to deliver the personal service their communities value.
By embracing smart integration solutions, community banks don’t have to sacrifice the personal service they’re known for. Instead, they can build on their strengths—offering high-tech solutions with a high-touch approach. In an environment where margins are tight and competition is fierce, this balance will be the key to positioning community banks for long-term success.
Cindy Snow is VP, Customer Success at Core10.
Become a member to unlock exclusive content, connect with industry experts, and gain access to valuable resources. If your employer is an institutional member, activate your ProSight membership benefits with a simple email address.
