OCC Finds Outdated Core Systems Threaten Future of US Regional Banks

Across the country, thousands of community and regional banks are facing a seismic challenge: adapt to the demands of a digital-first world or risk obsolescence.

Throughout the history of financial services, community banks have played a vital role in local economies. They provide loans to small businesses, serve underbanked communities and offer a level of customer service that megabanks can’t easily replicate. Yet they now face unprecedented pressure, ranging from stablecoins to FinTech platforms like Square and Block seeking to “bank their base.” It’s a challenging landscape out there for smaller banks, and that’s not even including competition from larger financial institutions.

With the news Monday (June 30) that stablecoin issuer Circle is seeking a charter for its own national trust bank, the pressure is only growing.

But modernization isn’t easy when banking tech stacks predate the iPhone by a century. New insights from the Office of the Comptroller of the Currency’s 2025 Request for Information (RFI) on community bank digitalization paint a vivid picture of both the ambition and adversity in this critical transformation.

The RFI comments suggest the problem isn’t just financial. It’s architectural. Most community and regional banks are constrained by decades-old core systems with brittle integrations and limited data portability. These legacy platforms, which are often built on COBOL and patched over time, form the operational heart of community banks, managing deposits, loans and customer accounts. But they also function as chokepoints for innovation.

Cores often act as gatekeepers, dictating which third-party services can be deployed through preferred vendor ecosystems. Per the OCC’s RFI, community banks that seek more nimble solutions are penalized with long development cycles, high integration fees and, in some cases, outright technical incompatibility. Even when regional banks do push forward, they face another steep climb: retraining staff and navigating contracts written in a different technological era.

Read more: With Bitcoin at Record High, Smaller Banks Face Urgent Crypto Decisions

The Third-Party Dilemma and the Great Leap Forward

Still, the latest findings from the “Credit Union Innovation Readiness Index: The Smallest Credit Unions Step It Up,” a PYMNTS Intelligence and Velera collaboration, reveal that, when it comes to innovation, smaller lenders aren’t standing still, and one of the advantages of smaller banks is their ability to adopt collaborative models.

Yet a recurring theme in the RFI responses was the mismatch between what regulators expect from banks and what banks can reasonably demand from vendors. Several banks noted that their third-party providers were slow to adopt advanced security features, delayed integration timelines, or were opaque about how customer data was managed.

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.

In PYMNTS Intelligence’s Real-Time Payments Tracker® series report titled “Catching the Rails: The Real-Time Payments Opportunity for Small FIs,” we found that larger financial institutions (FIs) have been throwing their time and resources into connecting to real-time rails, while smaller banks are lagging — even when it comes to setting clients up with real-time receiving capabilities.

And while much of the focus has been on digital capabilities, respondents also pointed to deeper operational constraints. Chief among them: talent and governance. Many community banks are run by people who came up through credit or retail, not tech. That creates a leadership gap when it comes to making strategic bets on digital.

This human capital deficit has knock-on effects. It slows down project execution, increases dependency on vendors, and makes it harder to interpret evolving regulatory guidance, such as the OCC’s own bulletin on third-party risk management, which was updated in 2023.

Read more: Can Digital Wallets, Stablecoins Solve Small Banks’ Cross-Border Cost Center?

The Stakes Are Bigger Than Banks

Ultimately, the digital fate of community and regional banks isn’t just about market share or balance sheets. It’s about the future of financial access in America, particularly for the small and medium-sized businesses (SMBs) that smaller banks serve.

Despite the hurdles, optimism prevails. Digitalization is helping community banks modernize operations, expand their reach, and deepen customer relationships. It is enabling them to compete on experience, not just geography. And most importantly, it is reinforcing their role as engines for SMBs.

According to research from PYMNTS Intelligence and i2c, SMBs want fewer fees and better service, and that’s where community banks can shine compared to larger, legacy financial institutions.

“SMBs don’t just want a bank — they want a partner,” David Durovy, SVP of transformation at i2c, told PYMNTS. “And community banks and credit unions are uniquely positioned to be that partner.”