If you’re the CEO or head of IT for a regional bank or credit union group, you already know the squeeze. You are also absorbing it across every location you are responsible for, which quietly multiplies every inefficiency: a process that wastes ten minutes at one branch wastes ten minutes at all of them. Between 2020 and 2024, cost of funds (what community banks pay to hold deposits) climbed from 0.74% to 2.85%. Over the same time, fintechs, neobanks, and digital banks won 44% of all new checking accounts. Margins got tighter on one side and growth got harder on the other. Many banking institutions have handled it the same way: by asking a small central team to cover more ground. Eventually, the temporary workarounds stop solving the problem, so here’s why banks can’t afford to put off modernization.
The Pressure for Modernization is Coming From Three Directions
Three things are happening simultaneously, and they feed each other.
- Margin compression: Deposits cost more than they did, and lending has been slower to make up the difference. Half of all community banks turned to brokered deposits (deposits bought through a middleman rather than gathered locally) in 2024, which is up from 39% the year before. Credit union first mortgage balances grew just 2.6% in 2023. Small business lending, which used to be a community banking strength, fell 18% year over year by the end of that year.
- Digital-native competition: Among Gen Z, 29% now name a digital bank or fintech as their primary checking provider, up from 11% in 2020. Millennials moved almost identically, which means this isn’t a trend smaller banking institutions can wait out.
- Compliance costs that hit harder: Compliance is largely a fixed cost, meaning you pay for much of the same apparatus whether you serve 40,000 or 40 million customers. A megabank spreads that across an enormous base, where it disappears. At the smaller scale, it competes directly with the money you’d rather spend on improving how you operate.
At face value, margin compression, digital competition, and compliance costs seem like purely financial or operational pressures. However, the root of the problem is not having the right technology and security policies in place. When a loan decision takes eleven days, opening an account takes four, and a quarterly report takes a week to assemble by hand, it is a direct failure of infrastructure. Without modern tools, slow operations make these market pressures unmanageable, and waiting to upgrade only creates massive operational and security gaps. If your current setup is holding you back, it is time to modernize.
What Modernization Actually Means, and What it Doesn’t
First, modernization does not mean replacing your core. Your core is the system that holds accounts and processes transactions. It’s the thing everything else plugs into, and swapping it out is genuinely disruptive and expensive. MSPs that treat this as the entry point for modernization are what stop smaller banks and credit unions from starting a modernization journey at all. Incremental modernization works without straining your current systems and operations. Start in this order:
- Automate a process or two with strong governance: Pick something high-volume and repetitive, like account opening, since identity verification, document upload, and routing follow the same path on every application. Loan document collection and monthly compliance reporting are close behind. However, automation requires strict governance. You must establish clear policies defining who owns the automated workflows, how data is handled, and how compliance is monitored so that speed never comes at the expense of control.
- Get data organized and protect against data loss: Make sure the information in your core, your digital banking platform, and your lending systems match and can move between them. As you build these bridges, implement strict data loss prevention (DLP) controls. Organizing your data also means securing it, ensuring sensitive customer financial records cannot be leaked, mishandled, or exposed during transit.
- Use the cloud as a connector under a Zero Trust policy: Cloud tools can sit between your existing core and the supplemental applications around it, letting them pass information back and forth automatically. That connection is what people mean by an integration layer. When building this layer, adopt a strict Zero Trust architectural policy. Never assume a user or system inside your network is safe. Every request, integration, and endpoint must be continuously authenticated, authorized, and validated before data access is granted.
- Enforce proactive vendor management: Modernization relies heavily on third-party cloud tools and supplemental applications. You cannot afford to treat vendors as “set it and forget it” partnerships. Vendor management must be an active, continuous process where you audit their security protocols, track their patching schedules, and understand exactly how their systems interact with your core data.
A good rule of thumb is to pick something manageable and test it out. Don’t try to solve all the problems at once.
Somewhere in all of this, someone on your board is going to ask about AI. AI isn’t a differentiator anymore but is now an expectation. In RSM’s 2026 survey, 87% of financial services respondents said AI was at least partly integrated into their operations, and 41% said it was fully embedded across core processes. But what is holding deployments back? The leading obstacles were security and privacy concerns (33%), data quality and availability (32%), and connecting to legacy systems (27%).
Two of the three (data quality and legacy integration) are infrastructure problems, which makes modern tooling, including AI-assisted tools, a good solution for chipping away to modernization. AI can help map fields between systems, flagging records that don’t match, and cleaning up years of inconsistent entry.
What Waiting Costs Banks and Credit Unions
Putting modernization off feels free because the cost doesn’t show up as an invoice. It shows up as hindrance, spread thin across every part of your operations.
- Slower lending decisions: Collecting documents, reviewing them, and routing them by hand stretches out timelines. Against competitors who answer in a day, you are no longer competitive.
- Onboarding friction: This is where you lose the accounts you already won. Every extra step or friction point between “yes” and a funded account is where someone gives up and moves on.
- Your best people doing data entry: Relationship banking is supposed to be the advantage, but every hour a lender or service rep spends rekeying information or hunting across three screens is an hour not spent on the work a national bank can’t replicate.
- Compliance rework: Pulling reports together manually can produce errors, and those errors produce rework.
- Outage and breach exposure: The more your bank runs on technology, the more expensive it is when something stops working. For example, in late 2023, roughly 60 US credit unions lost online and mobile banking at the same time. None of them had been breached directly, but their shared technology provider had skipped a security patch that had been public for weeks, and a ransomware attack did the rest. Banking institutions that fail to practice rigorous vendor management (neglecting to map vendor single points of failure or verify that partners are applying critical patches) are at extreme risk. Modernizing closes this gap by enforcing Zero Trust policies and maintaining tested fallback systems so your branches keep serving members even if a vendor goes down.
What this Means for Your IT Team (or person)
Most institutions between $200 million and $3 billion in assets don’t have the capacity to run optimization reviews, scope the first automation, sort out data, and test failover. Plus, hiring for this is expensive and hard to hold onto long-term. This gap is what our banking and credit union IT solutions offering, NetWatch VAULT, was built to close. It encompasses managed networking, connectivity, security, and around-the-clock support under one team and agreement. It’s how smaller institutions get the reach of a much larger IT department without building one.
If you already have an internal team you want to keep, co-managed IT is typically the better fit. Your people keep the institutional knowledge and stay in charge of the roadmap. Computer Solutions takes the overnight alerts, patching, monitoring, and more. If you’d like an outside read on where your IT environment stands and what your first step should be, contact our team today.
FAQ
Why do community banks and credit unions need to modernize now rather than in a few years?
There are three pressures compounding at the same time: higher funding costs, digital-first competitors taking a growing share, and compliance costs that consume a larger portion of expense at a smaller institution. While these present as financial issues, the root problem is often not having the right technology and security policies in place to handle them. Slow operations and legacy infrastructure make these market shifts impossible to absorb safely.
What does technology modernization mean for a bank or credit union our size?
It means deploying the right technology and frameworks so your institution runs faster, scales securely, and serves customers better. True modernization means upgrading your workflow automation, data architecture, and security protocols simultaneously.
Do we have to replace our core system to modernize?
In most cases, no. You can modernize incrementally by building a cloud-based integration layer on top of your existing core. However, this layer must be secured using a strict Zero Trust policy (authenticating every single data request) and backed by strong governance to ensure you maintain total control over how information flows between systems.
Should we fix our data before deploying AI?
Largely, yes, though the two overlap. Infrastructure and data quality are major hurdles for AI deployment. Using modern tools to clean up data is a great first step, but it must be paired with robust data loss prevention (DLP) controls to ensure sensitive customer data is never exposed or misused by AI models.
How does vendor management fit into a modernization strategy?
It is one of the most critical pieces. Modernization relies on connecting third-party tools to your systems, which introduces risk if left unmanaged. Proactive vendor management means continuously auditing your technology partners, tracking their security patching schedules, and eliminating single points of failure so a vendor outage doesn’t become your operational crisis.
