2025 Banking Innovation Index: Community Banks Embrace Embedded Finance

While community presence remains important, it’s no longer enough to drive loyalty or long-term growth for mid-sized banks and credit unions. With a growing share of consumer and business banking happening online, digital innovation is now a non-negotiable. 

But which digital strategies should community banks adopt? And how urgently do they need to evolve?

To gain insight into community banks’ approach to digital innovation, Treasury Prime surveyed 300 decision-makers at the director level and above. We found that these leaders are embracing embedded finance as a strategic growth driver in a market defined by rising customer expectations and ongoing economic uncertainty. 

In fact, 100% of community financial institutions are actively participating in, launching or exploring embedded finance programs.

They’re also confident in their tech stacks, optimistic about their ability to address regulatory uncertainty and excited about the potential of instant payments. At the same time, banks are approaching embedded finance with a compliance-first mindset. Balancing speed and agility with regulatory discipline will be key to sustainable growth.

Key findings

1. Embedded finance is no longer optional. 99% of decision-makers say embedded finance is important to their intuition’s long-term survival, and 60% say it is extremely important.
2. Banking leaders have high expectations for embedded finance partners. Compliance-related factors like risk management approach (34%) ranked high alongside tech considerations like scalability or growth potential (31%), with no clear winner.
3. Regulatory uncertainty keeps compliance top of mind, but may not hold back innovation. About half of leaders (51%) say uncertainty is stalling digital innovation at their bank, while another 45% say uncertainty simply encourages them to be more proactive about compliance.
4. Banking leaders believe their tech stacks are mature. But are they too optimistic? More than half (55%) say their banking technology is “fully modernized” and upgraded with modern, flexible infrastructure.‍
5. “Real-time” and “instant” technologies are key to future growth. 40% of decision-makers say real-time payments infrastructure is critical to their growth strategy.

1. Embedded finance is no longer optional.

So, with interest in embedded finance so high, where are decision-makers focusing their efforts? Despite negative headlines about Banking-as-a-Service (BaaS) throughout the past year, over half of respondents (54%) said they were exploring or offering BaaS or embedded banking capabilities. 

Embedded lending (51%) and Payments-as-a-Service or embedded payments (49%) capabilities were also top responses. At the other end of the spectrum, compliance-related services ranked lower — possibly because decision-makers already consider them table stakes.

2. Banking leaders have high expectations for embedded finance partners.

When it comes to evaluating fintechs as potential embedded finance program partners, banking decision-makers haven’t reached a consensus on which considerations are most important. 

Unsurprisingly, compliance-related factors like risk management approach (34%), strong security and data protection (32%), and regulatory and compliance adherence (32%) rated highly. However, technological concerns like seamless API integration (31%) and scalability or growth potential (31%) weren’t far behind. 

The lack of a single defining priority reflects a complex reality: Each community bank is ultimately looking for a partner who fits its specific risk tolerance, and that means different things for different institutions. When vetting potential partners, leaders may evaluate fintechs on their business models, approaches to data security and even their existing banking relationships — and all of these can be equally important to building credibility and forging trust. 

The trend is largely the same when decision-makers consider forming relationships with fintech clients that want to use their bank’s infrastructure for embedded banking. Strong security and data protection (33%) is the top criteria leaders look at when evaluating fintech clients, but scalability and growth potential (30%), regulatory and compliance readiness (29%), and risk management and fraud controls (29%) are nearly as important.

3. Regulatory uncertainty keeps compliance top of mind, but may not hold back innovation.

While risk management and compliance are nonnegotiables for community financial institutions, maintaining those standards throughout the lifecycle of an embedded finance program is not always simple. 

Respondents flagged multiple compliance pain points around digital tool adoption, with consumer protection law compliance (38%) and open-banking and data-sharing compliance (37%) topping the list. These responses highlight the importance of centralizing digital compliance oversight within a unified bank operating system that streamlines reporting and ensures consistent enforcement of regulatory standards across every embedded finance touchpoint.

How has ongoing regulatory uncertainty at the federal level affected digital innovation projects, including embedded finance initiatives? Leaders of community financial institutions are split: About half (51%) say uncertainty is stalling digital innovation at their bank, while another 45% say uncertainty simply encourages them to be more proactive about compliance. It seems likely that the impact of uncertainty is uneven, discouraging some initiatives while having limited impact on others.

4. Community banks believe their tech stacks are mature. But are they too optimistic?

Decision-makers at community banks are confident their tech stacks are future-ready. More than half (55%) say their banking technology is “fully modernized” and upgraded with modern, flexible infrastructure.

In most cases, at least some of this modernized technology is built in-house. When it comes to embedded finance infrastructure specifically, almost three-quarters of respondents (71%) say they use (or plan to use) a mix of in-house and third-party technology to support embedded finance programs. Just 11% rely completely on third-party technology.

Community bank decision-makers have faith that these solutions can evolve with their needs: 100% are confident their current technology infrastructure can support their growth and market expansion goals over the next three years. And 62% are very confident.

However, it’s possible these answers are overly optimistic. A bank’s tech stack is only as modern as the capabilities it can deliver at scale — and these respondents may not have tested the limits of theirs yet. It’s one thing to digitize account management or streamline branch employees’ everyday tasks, but deploying a full embedded finance program is another challenge entirely.

Among the community financial institutions that have not fully modernized their banking technology, over a quarter (26%) say security and fraud concerns were the top barrier to modernization — highlighting the continued importance of compliance in digital initiatives.

5. “Real-time” and “instant” technologies are key to future growth.

Leaders of community financial institutions recognize their customers have higher expectations for speed and convenience. As a result, they’re prioritizing technology that supports faster and real-time financial interactions, whether it’s payment settlement, credit decisioning or wage access.

For instance, 40% of decision-makers say real-time payments infrastructure is critical to their growth strategy. Just as many (40%) say the same about embedded finance infrastructure, while 36% say lending and credit decisioning automation is critical.

It’s not surprising real-time payments infrastructure is a top priority for community financial institutions since nearly a third (30%) of leaders say real-time and instant payments capabilities are important to their business customers. The same percentage of leaders (30%) say instant credit and loan approvals are a top priority for business customers.

On the consumer front, the story is all about speed as well. Decision-makers say account holders most want digital banking that offers digital loan and application approval (34%), early direct–deposit access (28%) and instant peer-to-peer money transfers (28%). Personalized budgeting and financial management tools take a backseat to these priorities.

Playing the long game of banking innovation

Community and regional banks play a critical role in the financial ecosystem, but their position may erode if they aren’t able to capitalize on embedded finance opportunities that open new revenue streams. 

Our research shows that banking leaders are rising to the challenge — and thinking ahead to the next evolution of their industry. By embracing embedded finance, carefully vetting partners, navigating regulatory uncertainty and continuing to evolve their tech stacks to support instant and real-time payments, they can future-proof their infrastructure and lay a foundation for long-term growth.

Methodology

Treasury Prime surveyed 300 U.S.-based leaders at community and regional banks and credit unions, which are defined by the Federal Reserve as institutions with less than $100 billion in total consolidated assets. All respondents occupy senior leadership roles, Vice President or higher, and are part of their institution's decision-making process for IT, operations, risk management, compliance, commercial/retail strategy or organizational strategy. The survey was conducted March 23 - April 8, 2025. 

‍