What’s the state of neighborhood banking within the US as we speak? How are neighborhood banks evolving and remodeling at a time of each potential alternative and unprecedented problem and competitors?
Success tales about how neighborhood banks throughout the nation are profiting from new applied sciences like generative AI and embedded finance will probably be a serious a part of the dialog later this yr at FinovateSpring, Could 5 by means of Could 7, in San Diego.
With that in thoughts, as we speak we’re looking 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 similar to fee companies and wealth administration, these fintech opponents have successfully leveraged enabling applied sciences like AI and embedded finance to create digital platforms capable of appeal to prospects, particularly youthful prospects who’re digitally native and have fewer ties to the standard banking system. Nonbanks with out a bodily presence, for instance, produced a 7% year-over-year change in competitiveness in fee companies, in response to the neighborhood bankers surveyed.
That stated, 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 fundamental opponents in fee companies and nonbanks as their major rivals in wealth administration and retirement companies.
The battle over deposits continues to be a major problem for many banks and monetary establishments, and neighborhood banks are not any totally different. Whereas transaction deposit ranges have stabilized lately, 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 stated that they “all the time” responded to fee adjustments elevated by greater than 38% to signify 1 / 4 of all survey individuals.
Fraud and monetary crime stay paramount considerations
When it comes to inside dangers, neighborhood bankers cited cybercrime as a prime problem by far all others. Each credit score and debit card fraud are the most typical kinds of fraud reported when it comes to greenback losses, with test fraud, id theft, and account takeover additionally among the many chief challenges. The survey famous that these monetary crimes—card fraud, test fraud, and id theft with account takeover—signify the lion’s share of each whole fraud circumstances and greenback losses.
So far, the neighborhood bankers surveyed indicated that they had 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 value construction. We’ve invested closely in techniques and processes and added workers to evaluate outputs to guard prospects and stop fraud. Fraud is just not but a big loss merchandise for us, nevertheless it could possibly be.”
E-signatures and distant deposit over AI and BaaS
For all of the speak of AI and stablecoins, the applied sciences which are transferring the needle for a lot of neighborhood banks are extra pedestrian and sensible than one may think. Applied sciences seen as “extraordinarily” or “very” necessary included such options as e-signature, distant deposit seize (RDC), and built-in mortgage processing techniques. On the backside of the checklist of priorities? Interactive teller machines (ITMs) and fintech partnerships for Banking-as-Service had been deemed “under no circumstances necessary” by greater than 50% and practically 40% of respondents, respectively.
Requested to look ahead over the following 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 cell banking companies would be the most promising alternative for his or her financial institution within the subsequent half decade. Absolutely built-in mortgage processing techniques got here in second at simply over 61% with cloud-based core techniques at greater than 53%. AI? As a device for enhancing buyer interactions, AI know-how earned lower than half the variety of respondents. Partnerships with fintechs? For digital transformation, a couple of third. For BaaS, a couple of 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 provides numerous takeaways that may assist make these connections fruitful for each fintechs and neighborhood banks.
Boosting deposit progress—Fintechs can help neighborhood banks in boosting deposit progress by providing instruments similar to personalised financial savings plans and aggressive rate of interest administration options. Enhanced buyer engagement platforms that closely incentivize deposit loyalty may also be invaluable. Fintechs can even present neighborhood banks with analytics to assist them establish and reply to deposit traits.
Scalable mortgage administration know-how—Making the method of mortgage origination, underwriting, and servicing simpler for neighborhood banks is essential to serving to them win in opposition to competitors in key financing areas similar to small enterprise, agriculture, and industrial actual property. That is additionally the place AI-powered options can have a dramatically constructive impression. Streamlining processes, bettering applicant evaluate, and enhancing the shopper expertise in lending total are areas the place fintechs have a major monitor report of success and might enormously 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 handbook duties more and more pointless, as automation and agentic AI rework legacy workflows into clean 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 rapidly and fully to make sure compliance. Fintechs specializing in compliance administration instruments and companies will be key allies for neighborhood banks at a time of serious regulatory change and uncertainty.
Photograph by Hannah Busing on Unsplash
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