Thought piece

Bridging the ‘core’ divide in American banking

By Jody Bhagat and Josh Oliver

There’s a gap in the American banking landscape right now that’s not getting as much attention as it deserves. And it’s not strictly the much-extolled AI divide. It’s the “core” gap.

Many American banks, especially community banks, are still tied to legacy “core technology”. This powers the software infrastructure that runs their fundamental, back-end operation - the nuts and bolts of their tech, if you like.

But to face into the future with confidence and serve their existing customers, as well as attracting new ones, they need an update - a significant one - that will improve their ability to perform key operational tasks, such as dynamic pricing or product innovation, in order to better compete against peers, large and small.   

These banks remain structurally constrained by closed architectures, high integration costs, and outdated tech that has created a bottleneck for digital evolution. 

The constraints do not simply slow innovation. They also raise broader and alarming questions of operational resilience and the long-term competitive nature of the US banking system itself. 

Recognizing the importance of innovation in the banking ecosystem, the Treasury’s Office of the Comptroller of the Currency (OCC) recently issued a formal Request for Information on the barriers to innovation and progress. 

In its well articulated response, the Independent Community Bankers of America (ICBA) asserted that banks aren’t failing to innovate due to a lack of ambition, but deep structural problems. 

The legacy issue

The ICBA highlighted a critical friction point: while community banks possess the local expertise and desire to innovate, they are tethered to providers that treat Application Programming Interfaces (APIs) and third-party integrations as expensive add-ons rather than core functions. This results in high integration costs and reliance on slow, rigid systems. 

The ICBA conveyed the risks, but we believe the vulnerability of operating on legacy, out-dated technology and vendor models are not fully understood. 

The banking industry needs to embrace modern technology platforms that will allow banks to operate at significantly greater efficiency, deliver innovations at a rapid pace, and, yes, embrace AI advancements at scale to drive outcomes. 

With a modern core and platform, banks can do more than just compete on service - they can deliver differentiated and tailored propositions to the market that will allow them to better compete and win. 

The banking industry and regulators should be much more demanding of technology providers to ensure banks are positioned to compete and thrive amidst a backdrop of dramatic change. Staying with old technology simply because it’s familiar is neither a safe or sound approach. 

Future-ready digital banking

Banks should be demanding that their technology platforms allow them to operate more efficiently and shift IT spend to business-value generating activities. 

They should also be able to embrace new AI technologies at scale, leverage third party best practice solutions, and deliver a more adaptive risk and control environment with improved controls.  

With an appreciation of the importance of this moment in time for the banking industry, we propose a blueprint for modern banking that issues a challenge for technology providers to meet the moment and improve the competitiveness of the banking industry.

Success requires a fundamental shift in the banking operating model - one that prioritises autonomy, resilience, and transparency. For the long-term vitality of the sector, the industry needs infrastructure that embeds control directly into the operating model, providing regulators and bank managers with granular, real-time visibility. 

Banks also need to be able to deliver tailored solutions more rapidly to the market, but their tech spend is largely dedicated to maintaining their existing core tech. Modern, cloud-native platforms allow for integration as standard - and with superior operational resilience, banks can innovate their product offering at speed and at scale, providing value for customers with greater efficiency and controls. 

The era of autonomy

The ICBA’s report is a wake-up call. Staying with legacy systems is no longer the safe choice. It creates a vulnerability that works against the operational efficiency needed to scale in this competitive climate. To remain relevant in a rapidly evolving marketplace, community banks should insist on core platforms that give 360-degree customer data in real-time, have true API orchestration and possess cloud-native capability. 

This can lead to banks scaling and meeting their growth ambitions, reducing structural dependency risk, and modernizing their operating foundations.

Modernization does not require deregulation. Properly governed, it enhances resilience, strengthens oversight, and supports the long-term vitality of community banking.

Institutions that modernize thoughtfully, prioritising transparency, interoperability, and resilience, will be better positioned to compete, while meeting evolving supervisory and regulatory expectations. 

Community banks should - and can - be enabled to operate with fintech-level agility while remaining the trusted local institutions their customers value so much. They can also be the institutions regulators rely upon to maintain the safety and soundness of the US financial system.