Community and regional banks are at a critical juncture. Without meaningful modernization, they risk falling behind — not just competitively, but operationally and in terms of compliance and cybersecurity.

The OCC’s findings also shed light on the monopolistic nature of core banking vendors. Many banks are locked into long-term contracts with a handful of providers, limiting their ability to negotiate, customize services, or switch to more agile alternatives. These “vendor lock-ins” lead to slow integrations and high costs, further widening the innovation gap between regional banks and digital-native fintechs.

Additionally, the OCC pointed to internal limitations within banks themselves — especially a lack of in-house technical expertise. Many financial institutions struggle to attract and retain IT talent, leaving them reliant on third-party vendors for even minor system updates or digital features. This dependence stifles agility and delays modernization efforts.

Meanwhile, nonbank financial technology companies — including stablecoin issuers like Circle and embedded finance providers such as Square — are rapidly capturing market share by offering faster, cheaper, and more user-friendly financial services. These companies are not burdened by legacy systems and are free to build modular, cloud-native platforms.

The OCC’s call for comments aims to gather insights from banks, fintechs, vendors, and the public on how to encourage core modernization and foster a more competitive and innovative financial ecosystem. It also signals that regulatory expectations may soon evolve to include more robust digital capabilities and stronger technology governance.

Industry experts suggest that collaboration between banks and fintech firms could offer a path forward. Regional banks don’t have to build everything from scratch. Strategic partnerships, cloud-based cores, and open banking APIs can help level the playing field.