Progressive Modernization Can Spark A Revival In U.S. Regional Banks

Rodrigo Silva is President – Americas at Temenos, the banking software company.

Across the United States, regional banks play a vital role in the financial landscape. They specialize in catering to small and medium businesses, which are essential to the economy, have a strong connection to their local communities, and often build strong trust-based relationships with their customers. They remind us that personal service matters. And yet, in a world where everything is digital, regional banks face a challenging future.

Business Challenges And Macro Headwinds

Digital disruption has made it easy for customers to switch banks and unbundle their banking relationships, creating competition for each product in a customer’s wallet.

There is growing competition from fintechs and tech firms and the mega banks that are spending billions on their tech and talent—digitizing customer journeys, automating the back office and making big bets on next-gen technologies like artificial intelligence (AI).

Stubbornly high inflation readings and elevated interest rates have also weighed on regional banks’ profitability, leading to high deposit management costs and contracting net interest income. In addition, these lenders are also facing an increasingly complex regulatory climate, particularly regarding cybersecurity rulemaking, with the pressure for continued investment to enhance oversight to manage risks effectively.

Embracing Change On The Path To Growth

With the right approach to technology, regional banks have the potential to innovate their way to competitiveness and higher profits. Real-time payments, embedded finance services, hyper-personalized customer experiences and automation of once-costly back-office functions are some of the features on this path to growth.

All this means change. It means leaving behind those old legacy systems that hinder innovation and embracing advanced, API-driven, cloud-native solutions. A modern core banking platform provides banks with the agility to adapt to change and leverage innovative technologies like GenAI in a responsible way.

With broad-scale technology modernization, regional banks can reinvent their business models and how they engage with customers. Indeed, regional banks are arguably better set up than their national counterparts to deliver the highly personalized and seamless experiences that customers want.

Smaller should mean less complex—technically, operationally and organizationally—and more agile to enact change faster. Regional banks should double down on this advantage and take it upon themselves to lead the revitalization of their market.

Combining Community Focus And Modern Technology

As the CEO of one of our community bank customers said recently, a lot of digital banking is generic and corporate-looking, and the identity of the company is difficult to distinguish. This bank has been working toward taking a very impactful community presence and making sure that it develops a clear digital banking identity.

I believe there is a white space opportunity within community banking—to have a strong relationship presence while also having a strong digital presence and integrating those two together.

Progressive Modernization

Modernization can be evolutionary, gradually enhancing and updating legacy core systems to retain existing functionality while incorporating modern capabilities. A composable banking architecture allows banks to do this safely.

One of our regional bank customers that has done this well progressively moved off legacy systems to a future-ready platform by starting with core banking for deposits, then loan origination and, most recently, real-time payments.

Staying at the forefront of technology ensures the best service to your customers, and a modern core banking platform is an accelerator for innovation and digital customer experiences.

The Migration To Cloud And SaaS

At the center of everything is the cloud, and banks are growing more confident in adopting public cloud services, bolstered by substantial investments from hyperscalers in security measures.

A recent Economist Impact study commissioned by our company found that 51% of bankers surveyed believe banks will not own any data centers in five years because they will have moved to the public cloud. We see this more so in North America than in other regions where 36% of banks are prioritizing moving domestic core banking to the cloud versus 26% of banks globally.

Large banks are prioritizing the migration of digital banking and customer-facing channels and core banking for secondary business lines and overseas operations. Smaller and midsize banks are adopting the public cloud and SaaS for primary business lines and domestic operations as well.

With SaaS, banks can focus on innovation for their customers, providing better products and services while also keeping operational costs in check. The more mature SaaS banking platforms give banks access to a broad set of banking capabilities on a secure, resilient and continuously updated service. This gives banks agility and investment in innovation in a way they would otherwise be unable to achieve.

A Technology-Driven Regional Banking Revival

Revitalizing the U.S. regional banking sector is crucial for maintaining a competitive market that benefits customers. Technology is the way forward. Through progressive modernization and by embracing AI and cloud technologies, regional banks can transform their business models and customer interactions. Ultimately, by combining their community focus with modern technology, regional banks can thrive and continue to play a crucial role in the financial landscape.

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