By Tara Schultz
Community banks have more innovation paths available to them than ever before. The challenge isn’t just finding options—it’s making strategic choices that actually serve their markets.
There’s no one-size-fits-all innovation strategy for community banks, yet too often the industry conversation pushes toward universal ideologies: Build everything in-house, overhaul entire foundational systems or outsource innovation entirely. But the banks that are truly succeeding follow a different playbook entirely. They’re not following someone else’s model; they’re making strategic decisions tailored to their specific market, talent, timing, urgency of problems, risk tolerance and budget.
The difference comes down to strategic alignment, partner readiness and the clarity to know when each approach makes sense. They need to be surrounded by options that underscore, support and encourage the beauty of “choice,” both from a technology and a business perspective.
The banks that are truly innovating follow a different playbook—their own. They build where it serves their core strategies, investing in custom development when a capability truly differentiates them or when their local knowledge demands solutions that don’t exist off the shelf. But they’re equally comfortable partnering for specialized functions like fraud prevention or niche vertical solutions, understanding that a focused fintech will likely deliver better results faster than an in-house team starting from scratch with limited development resources.
Most importantly, these institutions preserve flexibility. They understand that today’s third-party solution might become tomorrow’s in-house capability—or vice versa.
This approach requires genuine partnerships, not just vendor relationships. Too many partnerships prioritize deal-making over infrastructure scaling and compliance, leaving banks isolated and susceptible to regulatory risk. The stakes of this distinction have never been higher. Federal enforcement actions—which affected 13.5% of BaaS banks in 2023, according to S&P Global—demonstrate the cost of choosing deal-ready vendors over partner-ready ones.
But this applies to any fintech integration, whether it’s a customer-facing digital lending platform, enhanced fraud detection or a simple API integration delivering automation and efficiency. Banks and fintechs that prioritized rapid deal-making over genuine partnership readiness faced regulatory scrutiny, while institutions investing in thoughtful vendor selection, upfront clarity of ownership and ongoing oversight thrived.
A new wave of bank-driven innovation is demonstrating this principle through cohort-based models that allow community banks to strategically invest in technologies that meet specific use cases. JAM FINTOP, for instance, unites more than 90 community banks representing over $1.3 trillion in assets—creating collective buying power equivalent to the nation’s fifth-largest bank. Its recent investments like Cerebro Capital’s AI-powered commercial lending platform, which recently reached $1 billion in cumulative loan closings, and SRA Watchtower’s risk and business intelligence solutions demonstrate how shared investment accelerates fintech development while reducing individual bank risk.
These aren’t traditional outsourcing relationships—they’re strategic partnerships where community banks shape solutions that actually meet their needs and solve their most critical problems. Other innovative models demonstrate this shift in different ways. The ICBA ThinkTECH Accelerator hosts “Regulator Days” where banks and fintechs engage directly with FDIC, Federal Reserve and OCC officials, ensuring solutions meet compliance standards.
Alloy Labs is another example of how community banks are embracing strategic flexibility, bringing innovation-driven community and mid-sized banks together to partner with startups, co-create differentiated solutions and achieve exponential growth. Operating an Alchemist Fund, the consortium allows member banks to make strategic investments in early-stage fintech companies. Their Alchemist Fund’s slogan speaks for itself: “We are looking for partners to help us reinvent banking, not just replumb it.”
The Competitive Advantage of Flexibility
The ability to change course as priorities shift is itself a competitive advantage. A bank that can seamlessly move from a third-party lending platform to an in-house solution when its volume justifies the investment has more strategic options than a bank locked into either approach.
This flexibility is especially critical as community banks face increasing pressure to differentiate themselves in crowded markets. Banks serving agricultural communities need different capabilities than those focused on urban commercial lending. Banks with $100 million in assets operate under different constraints than those approaching $1 billion. One-size-fits-all innovation strategies ignore these fundamental realities.
The innovation debate has become too focused on ideology and not focused enough on the results and the impact of the problems banks are solving. Community banks don’t need to choose between thinking like fintechs or thinking like traditional banks. They need to think like community banks—institutions that deeply understand their markets, operate under specific regulatory and resource constraints and serve customers who value relationship banking alongside modern convenience.
About the Author
Tara Schultz serves as senior vice president of Strategic Insights and Industry Relations at CSI. In this role, she develops corporate strategies to accelerate revenue growth through new products, partnerships and acquisitions. She holds more than 15 years of experience in the fintech and financial services industry through her time at Wells Fargo and CSI.