What is generally considered to be the first automatic teller machine (ATM) was installed at a Barclays branch in the UK in 1967. Unlike the modern version, it didn’t use plastic cards. Instead, customers inserted a single-use paper voucher that contained a small amount of radioactive carbon-14 so the machine could authenticate the user. Banking technology has come a long way since then!In this second and final article of our year-in-review series, we review some of the innovations that have created both opportunities and challenges for community financial institutions (CFIs) in 2025, and examine how they have responded to remain competitive and build resilience.1. Digital Transformation — AI and AutomationAccording to Bank Director’s 2025 Technology survey, 71% of respondents increased their technology budget by a median of 10% over the previous year. The median allocated average was $2.5MM, or 14% of noninterest expenses, a significant commitment. While these budgets cover a wide range of priorities — from modernizing core systems and cybersecurity investments to enhancing digital and mobile customer channels — a growing share is being directed towards artificial intelligence (AI), data analytics, and automation initiatives. These tools offer CFIs a real opportunity to increase efficiencies, compete more effectively with neobanks and fintechs, and deliver a more personalized, frictionless customer experience. In fact, CSI’s latest report highlights AI as the most significant technology trend, with one-third of respondents (33%) recognizing its transformative potential to strengthen risk management and prevent fraud.CFI Strategies:While some CFIs have remained cautious due to cost, regulatory considerations, limited internal capacity, or unclear use cases, many are actively exploring potential applications. Others have begun implementing a focused set of practical, ROI-driven AI and automation strategies aimed at achieving specific operational, customer, or risk management goals.
- Improving fraud detection. As fraud and fraudulent account-opening rates rise, CFIs increasingly view AI as a necessary line of defense. Automation helps them monitor large volumes of transactions in real time, improving detection speed and reducing false negatives or delays.
- Automating back-office workflows. Some institutions have introduced AI-powered workflow automation to handle loan onboarding by automatically ingesting customer financial statements, extracting key data, and summarizing it for underwriting, reducing manual data entry and speeding up credit decisions.
- Enhancing customer service. Many CFIs have deployed AI-powered chatbots, virtual assistants, and automated support tools to provide 24/7 service, handle routine inquiries, and offer tailored guidance on loans, account applications, and products, freeing up resources to focus on more complex issues.
2. Payments InnovationDriven by the demand for speed, convenience, and security, the payments industry has introduced significant innovations in recent years. Real-time payments are becoming more mainstream for both businesses and consumers. Likewise, the demand for financial services integrated into non-financial platforms is driving a surge in embedded finance. Cross-border payments are also on the rise — the market was valued at $68.9B in 2024 and is expected to grow at a CAGR of 5.9% — driven by increasing trade activities, remittances, and e-commerce growth. Finally, stablecoins are emerging as a new payment rail that sits alongside existing rails, adding new capabilities, such as speed, programmability, and 24/7/365 settlement.CFI Strategies:
- Adopting real-time payments. CFIs have been increasingly embracing instant payments as a core part of their offering. There are currently 1.5K institutions participating in the FedNow Service® — 95% are CFIs — and over 1K operate on the RTP Network, with 58% of institutions offering both.
- Embracing embedded payments. This is now seen as a must-have by CFIs. A recent report found that 100% of institutions surveyed are either offering, launching, or exploring embedded finance programs. To do so, they are partnering with third-party providers and keeping compliance front of mind.
- Transitioning to ISO 20022. This year marked two major milestones in the industry’s move to ISO 20022. CFIs successfully adopted the new ISO format for domestic Fedwire payments, improving the structure and clarity of payment data. The international payments community also advanced its ISO 20022 migration through Swift, supporting richer information and greater consistency across global flows as more institutions shift to the new standard.
- Exploring stablecoins. The approval of the GENIUS Act has opened the door for CFIs to explore modern payment capabilities with clearer guardrails and less risk. At this early stage, most efforts focus on assessing operational exposure, monitoring evolving rules, identifying practical use cases, and preparing staff for potential integration.
3. Cybersecurity and Data PrivacyFor the sixth consecutive year, cybersecurity has held the top spot of all internal and external risks faced by CFIs in CSBS’s annual survey, with 94% of respondents rating the risk “extremely important” or “very important”. Key threats include ransomware and malware attacks, phishing and social engineering, deepfakes, insider threats, third-party vulnerabilities, payment fraud, and cloud weaknesses.CFI Strategies:
- Strengthening detection and prevention. CFIs have deployed AI-driven fraud monitoring, real-time oversight of instant-payment transactions, and advanced endpoint protection. They’ve also tightened identity and access controls through MFA and zero-trust principles, enhanced customer-facing security with biometrics and device intelligence, and secured their cloud and network environments.
- Boosting staff and customer education. With the vast majority of breaches linked to human error, CFIs have bolstered their training programs and developed clear response playbooks. Another focus has been on increasing their communication with customers to ensure they remain alert to the latest threats.
- Tightening vendor scrutiny. Many CFIs are rigorously vetting third-party vendors — requiring audits, certifications, and documented incident-response plans — while tightly limiting each vendor’s access to only what’s necessary and maintaining strict contingency plans to reduce exposure.
- Improving incident response. Recognizing that breaches are inevitable, CFIs have strengthened their incident-response capabilities by updating playbooks, conducting regular tabletop exercises, and ensuring teams can quickly detect, contain, and recover from emerging cyber threats.
Technology innovation has created powerful opportunities for CFIs — from AI, automation, and real-time payments that streamline operations and enhance customer experiences to new embedded and digital services that expand their reach. At the same time, these advances have introduced new risks, including more sophisticated cyberattacks and greater operational complexity. In response, CFIs have leveraged these innovations to stay competitive while strengthening their defenses, building the resilience needed to operate safely in an increasingly digital financial landscape.
