There is no technology conversation in banking that is more important or more consistently avoided than core modernization. In more than two decades of consulting, I have watched banks invest billions in digital facades built on top of forty-year-old core systems. The metaphor I use with bank management and boards is blunt, "You are building a smart home on a foundation of crumbling concrete". Everything in this article series from agentic AI, real-time payments, stablecoin readiness, cybersecurity, customer experience, depends on the capabilities of the underlying core infrastructure. And for the majority of institutions, your infrastructure is not ready for what 2026 and beyond demands.

CSI's 2026 Banking Priorities survey reports that 44 percent of respondents cite technology modernization as their top strategic priority, a figure that rises sharply with institution size, from 31 percent at banks between $100 million and $250 million in assets to 59 percent at banks with $5 billion to $10 billion. That correlation should alarm community bank leaders because it is precisely backwards from where it should be. The smaller institutions that are not prioritizing modernization are often the ones most at risk. Their cores tend to be the oldest, the least capable, and the most brittle, yet they have the fewest resources to recover from a catastrophic core failure. In my view, they should be modernizing first, not last.

Cloud Question Is Settled / Architecture Question Is Not

Finastra's State of the Nation Report 2026 documents that 84 percent of banks are using the cloud in some capacity. Datos Insights shows that 79 percent of banks rate cloud-native deployment capability as high or critical importance. The FFIEC Joint Statement on Risk Management for Cloud Computing Services provides the regulatory framework, and federal examiners have become increasingly comfortable with well-governed cloud deployments.

My perspective is that the cloud debate is over. Properly configured cloud environments are now more secure than most on-premises data centers, and the institutions still debating cloud security are arguing about a question the market has already answered. The real challenge, the one that separates successful modernization from expensive disappointment, is application architecture. Moving a monolithic core system to the cloud without rearchitecting it for cloud-native operation is like putting a horse and buggy on a highway. You have changed the road, but you have not changed the vehicle.

The institutions that are getting modernization right are the ones that approach it as an architectural transformation, not an infrastructure migration. They are decomposing monolithic systems into modular, API-driven components that can be modernized incrementally. They are building integration layers that allow new capabilities to coexist with legacy functions during a multi-year transition. And they are selecting core vendors whose modernization roadmaps align with this architectural vision rather than vendors who are simply hosting their existing code in someone else's data center and calling it cloud.

Data Is the Foundation That Most Banks Have Not Built

If I had to name the single greatest obstacle to technology transformation in banking, it would not be legacy cores, budget constraints, or regulatory uncertainty. It would be data fragmentation. CSI's research shows that 50 percent of banks are integrating data analytics for commercial client insights, but 49 percent cite technology limitations or integration gaps as their biggest commercial banking obstacle. These two findings are directly connected: you cannot deliver analytical insights from data that is scattered across disconnected systems that do not communicate with each other.

In my consulting work at CCG Catalyst, I see this pattern with remarkable consistency. Banks want AI-powered insights, personalized customer experiences, and predictive analytics but their customer data sits in separate silos for deposits, loans, treasury management, and digital channels, with no unified view. They have a data problem masquerading as an AI problem. Until the data integration challenge is solved, until there is a single, reliable, real-time view of the customer across all products and channels, every AI initiative will underperform, every personalization effort will fall short, and every analytics project will deliver incomplete answers.

My advice to every bank leader I work with is the same, before you invest another dollar in AI or analytics, invest in data unification. It is unglamorous work. It does not generate exciting board presentations or impressive press releases. But it is the foundation on which everything else depends. With clean, unified data, AI becomes tractable, personalization becomes possible, and the business case for every other technology investment improves dramatically.

Embedded Banking: Opportunity With Guardrails

The 11:FS research on making embedded banking work is instructive, and it arrives at a moment when the banking-as-a-service model is undergoing a significant correction. The 2023 interagency guidance on third-party risk management applies directly to BaaS relationships, and multiple consent orders against BaaS banks in 2024 sent an unmistakable regulatory message, banks must maintain oversight of the customer relationship even when delivery happens through a fintech partner.

My view is that embedded banking and BaaS represent a genuine growth opportunity for community and regional institutions—but only for those that approach it with disciplined governance. The consent orders were not a signal that regulators oppose embedded banking. They were a signal that regulators will not tolerate banks outsourcing compliance along with customer delivery. The institutions that do embedded banking right—with proper customer verification, transaction monitoring, compliance oversight, and contractual controls—will find a profitable channel for reaching customers they could never serve through their branch networks alone. Those that outsource oversight along with operations will get burned, and deservedly so. I have advised both kinds of institutions, and the disciplined ones win every time.

The Talent and Budget Conversation Needs Reframing

Finastra reports that 43 percent of institutions cite talent shortages and 41 percent cite budget constraints as modernization barriers. Deloitte's research documents the now-familiar 93/7 spending imbalance—93 percent of AI-related spending goes to technology infrastructure while only 7 percent goes to people. These findings are related: when banks underinvest in talent, they lack the organizational capacity to execute modernization effectively, which makes the technology investment less productive, which makes the business case harder to justify, which further constrains the budget.

I reject the premise that talent shortages are an immovable constraint. They are leadership and investment problems. Banks that offer competitive technology roles with genuine career paths, invest in continuous learning and reskilling, and create cultures that embrace rather than resist change will attract the people they need. At CCG Catalyst, we work with banks on talent strategy constantly, and the institutions complaining loudest about talent shortages are often the same ones offering below-market compensation, rigid hierarchies, and outdated technology that drive good people away. This is a choice, not fate.

The budget conversation needs reframing as well. Core modernization is not a cost, it is an investment with measurable returns in operational efficiency, risk reduction, revenue enablement, and competitive positioning. We help banks model these returns, and the business case exists for institutions of virtually every size. The challenge is that the returns accrue over three to five years while the expenditure hits immediately, which makes for a difficult conversation in institutions focused on quarterly performance. That is why modernization requires board-level strategic commitment, not just an IT budget line item.

What Community Banks Should Demand From Their Core Vendors

CSI reports that 69 percent of community banks are likely to remain with their current core provider at the next contract renewal. Vendor stability has value—switching core providers is enormously disruptive, expensive, and risky. But vendor stability cannot be an excuse for accepting technological stagnation. Community banks should be pushing their core vendors hard on modernization roadmaps, API capabilities, cloud-native architectures, and the ability to integrate with third-party solutions through open standards.

If your core vendor cannot articulate a credible modernization path over the next three to five years, one that includes genuine API-driven architecture, real-time data access, and cloud-native deployment options it may be time for a difficult conversation. I have facilitated those conversations with many institutions. They are painful, but they are considerably less painful than waiting until your core vendor's limitations have cost you your best commercial relationships and your most capable employees.

The banks that compete effectively in their markets are the ones that think and act like technology companies, prioritizing architecture, integration, and data readiness alongside the traditional banking competencies of credit, compliance, and relationship management. Core modernization is the hardest conversation in banking because it touches everything: operations, risk, customer experience, and competitive positioning. It is also the most consequential. Every other technology initiative in this series is constrained by the capabilities of the underlying infrastructure. Banks that delay core modernization are not preserving the status quo. They are falling behind at an accelerating rate, and the gap is becoming visible in market share, customer satisfaction, and financial performance.

Sources

CSI/CITE Research, 2026 Banking Priorities Executive Report (October 2025 survey)

Finastra, Financial Services State of the Nation Survey 2026

Deloitte Insights, Tech Trends 2026 (The AI Dilemma chapter)

Datos Insights, Payment Hubs Report (cloud-native findings)

11:FS, Making Embedded Banking Work

Capgemini, Top Trends 2026 Banking

FFIEC Joint Statement on Risk Management for Cloud Computing Services (2020)

Interagency Guidance on Third-Party Relationships: Risk Management (2023)

OCC, Semiannual Risk Perspective, Fall 2025

Next in this series: Leading Through Transformation: Governance, Workforce, and the Road Ahead

CCG Catalyst Consulting is a banking and fintech advisory firm that has guided over 600 financial institutions through core modernization, digital transformation, AI strategy, payments, contract negotiations, and M&A. Through its Bankers Fintech Council, CCG Catalyst also bridges the gap between banks and fintechs to accelerate responsible innovation. Managing Partner Paul Schaus is a recognized Top 25 Financial Services Consultant, and subject matter expert in banking, bringing experience across every level of the industry to the firm's advisory practice. Learn more at www.ccgcatalyst.com