What’s the state of neighborhood banking within the US immediately? How are neighborhood banks evolving and reworking at a time of each potential alternative and unprecedented problem and competitors?
Success tales about how neighborhood banks throughout the nation are making the most of new applied sciences like generative AI and embedded finance can be a serious a part of the dialog later this yr at FinovateSpring, Could 5 by Could 7, in San Diego.
With that in thoughts, immediately we’re having a look on the findings from the 2025 CSBS Annual Survey of Neighborhood Banks that was unveiled on the Neighborhood Banking Analysis Convention final fall.
Rising competitors from inside and with out the neighborhood
The aggressive problem from nonbanks stays a serious concern for neighborhood banks all through the US. Particularly in areas resembling cost providers and wealth administration, these fintech rivals have successfully leveraged enabling applied sciences like AI and embedded finance to create digital platforms capable of entice clients, particularly youthful clients who’re digitally native and have fewer ties to the normal banking system. Nonbanks with out a bodily presence, for instance, produced a 7% year-over-year change in competitiveness in cost providers, based on the neighborhood bankers surveyed.
That mentioned, nonbanks nonetheless path different neighborhood banks as the most important competitors in seven out of 9 product and repair classes. Neighborhood banks recognized native regional banks as their essential rivals in cost providers and nonbanks as their main rivals in wealth administration and retirement providers.
The battle over deposits continues to be a big problem for many banks and monetary establishments, and neighborhood banks are not any totally different. Whereas transaction deposit ranges have stabilized in recent times, competitors from nonbank establishments has grown, particularly amongst these nonbanks which are out-of-market. This has compelled neighborhood bankers to regulate their pricing methods primarily based on native market charges; the survey famous that the variety of neighborhood bankers that mentioned that they “all the time” responded to price modifications elevated by greater than 38% to signify 1 / 4 of all survey contributors.
Fraud and monetary crime stay paramount considerations
When it comes to inside dangers, neighborhood bankers cited cybercrime as a prime difficulty by far all others. Each credit score and debit card fraud are the commonest kinds of fraud reported by way of greenback losses, with examine fraud, identification theft, and account takeover additionally among the many chief challenges. The survey famous that these monetary crimes—card fraud, examine fraud, and identification theft with account takeover—signify the lion’s share of each whole fraud circumstances and greenback losses.
Up to now, the neighborhood bankers surveyed indicated that they have been placing sources to work combatting fraud and monetary crime. After security and soundness practices, cash laundering and shopper safety requirements upkeep accounted for the second and third largest commitments of whole compliance bills.
“We proceed to place extra sources into cybersecurity and know-how threat,” one respondent famous, “which has grown quickly as a part of our price construction. We’ve invested closely in programs and processes and added workers to assessment outputs to guard clients and forestall fraud. Fraud just isn’t but a big loss merchandise for us, but it surely might be.”
E-signatures and distant deposit over AI and BaaS
For all of the discuss of AI and stablecoins, the applied sciences which are shifting the needle for a lot of neighborhood banks are extra pedestrian and sensible than one may think. Applied sciences considered as “extraordinarily” or “very” essential included such options as e-signature, distant deposit seize (RDC), and built-in mortgage processing programs. On the backside of the listing of priorities? Interactive teller machines (ITMs) and fintech partnerships for Banking-as-Service have been deemed “by no means essential” by greater than 50% and almost 40% of respondents, respectively.
Requested to look ahead over the subsequent 5 years, the responses from the neighborhood bankers are equally grounded. The highest response by far, with greater than 75% of respondents in settlement, was that the growth of cellular banking providers would be the most promising alternative for his or her financial institution within the subsequent half decade. Absolutely built-in mortgage processing programs got here in second at simply over 61% with cloud-based core programs at greater than 53%. AI? As a software for enhancing buyer interactions, AI know-how earned lower than half the variety of respondents. Partnerships with fintechs? For digital transformation, a few third. For BaaS, a few fifth.
What do neighborhood bankers need from fintechs?
The 2025 CSBS Annual Survey is a wealthy supply of data and perception into the pondering of neighborhood bankers within the US proper now. For fintechs seeking to work with these establishments, both as companions or distributors, the survey gives a lot of takeaways that may assist make these connections fruitful for each fintechs and neighborhood banks.
Boosting deposit progress—Fintechs can assist neighborhood banks in boosting deposit progress by providing instruments resembling customized financial savings plans and aggressive rate of interest administration options. Enhanced buyer engagement platforms that closely incentivize deposit loyalty may also be beneficial. Fintechs may present neighborhood banks with analytics to assist them determine and reply to deposit developments.
Scalable mortgage administration know-how—Making the method of mortgage origination, underwriting, and servicing simpler for neighborhood banks is vital to serving to them win towards competitors in key financing areas resembling small enterprise, agriculture, and industrial actual property. That is additionally the place AI-powered options can have a dramatically constructive influence. Streamlining processes, bettering applicant assessment, and enhancing the client expertise in lending total are areas the place fintechs have a big monitor report of success and might drastically profit neighborhood banks.
Operational effectivity and compliance—It’s true for many companies and neighborhood banks are not any exception. Enabling applied sciences are making guide duties more and more pointless, as automation and agentic AI remodel legacy workflows into easy operational processes freed from human error. These applied sciences are additionally making it simpler for establishments—together with neighborhood banks—to be extra conscious of their regulatory obligations and to be higher capable of act shortly and utterly to make sure compliance. Fintechs specializing in compliance administration instruments and providers may be key allies for neighborhood banks at a time of serious regulatory change and uncertainty.
Picture by Hannah Busing on Unsplash
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