Banks Say Core Provider Power Needs to Be Checked

Why It Matters

The concentration of core service providers hampers digital innovation for community banks and raises systemic risk, while regulatory reforms could reshape vendor‑bank dynamics and lower compliance costs.

Key Takeaways

• Core providers serve 70% of banks, creating vendor concentration.
• Community banks cite high integration costs and rigid contracts.
• OCC may shift oversight to vendors, easing bank compliance burden.
• Fiserv argues existing regulation already extensive, opposes public complaints registry.
• ICBA proposes shared due‑diligence tools and clearer examiner expectations.

Pulse Analysis

The U.S. core‑banking ecosystem has become increasingly oligopolistic, with the three largest providers powering more than 70 % of depository institutions and roughly half of credit unions. This concentration translates into higher integration and conversion costs for community banks, which often face inflexible contracts and limited bargaining power. As legacy platforms struggle to adopt modern fintech capabilities, banks risk falling behind in digital services, payments, and AI‑driven analytics. The resulting vendor lock‑in not only inflates operating expenses but also hampers competition among technology suppliers.

Regulators, led by the OCC, have opened a formal request for information to gauge how third‑party risk rules affect this market dynamic. Comment letters from the Independent Community Bankers of America, the American Bankers Association and the American Fintech Council call for a more balanced oversight model that shifts part of the due‑diligence burden onto the providers themselves and clarifies examiner expectations. They also urge the development of public AI risk‑management standards, arguing that consistent frameworks would reduce compliance duplication and enable smaller banks to negotiate better terms.

Core providers such as Fiserv argue that existing federal and state supervision already imposes a heavy compliance load, and they caution against public complaint registries that could expose proprietary data. Their position highlights a tension between maintaining robust oversight and preserving the economies of scale that keep per‑account pricing low for community banks. If the OCC adopts a hybrid approach—enhancing vendor examinations while providing transparent performance metrics—it could alleviate bank‑level costs without stifling innovation. The outcome will shape the pace of digital modernization across the banking sector.