I’m going to make a prediction that might make some of my friends in the industry uncomfortable: By the end of 2026, we will see a clear split in the community banking sector.
There will be the Platforms: agile institutions that have successfully decoupled their innovation from their legacy cores. And there will be the Zombies: banks that are technically solvent but operationally dead, unable to attract a single customer under the age of 50.
The data we’ve been seeing is merciless. In 2024, digital-native competitors (neobanks) captured 44% of all new checking account openings. That trend hasn’t slowed; it has accelerated. The “relationship banking” model, while noble, is losing the war to the “convenience banking” model. If a community bank cannot offer instant account opening, real-time money movement, and modern digital experiences, it doesn’t matter how good their coffee is in the lobby.
The “Zombie Bank” Phenomenon
What do I mean by “Zombie Banks”? These are institutions paralyzed by their own balance sheets. Following the aggressive rate hikes of 2023-2024, many community banks are sitting on massive unrealized losses in their securities portfolios (Accumulated Other Comprehensive Income, or AOCI). They aren’t insolvent, but they are stuck. They can’t sell those assets without taking a hit to capital, which means they can’t easily lend or invest in growth.
While these banks are hunkered down “waiting for rates to fall,” the fintech market is stealing their future. The “Zombie” strategy is to do nothing and hope to survive. Heading into 2026, hope is not a strategy.
The Legacy Core Trap: Why You Can’t Wait for Fiserv
For decades, community banks have been held hostage by the oligopoly of legacy core providers. We all know the names. We’ve seen the reports of client churn and the stock volatility at the major legacy processors. The reality is that waiting for your legacy provider to “modernize” is a resignation letter.
These legacy cores were built for a batch-processing world. They cannot handle the real-time, event-driven demands of 2026 payments. And migrating off them is a nightmare—a multi-year, multi-million dollar “heart transplant” that fails more often than it succeeds.
In 2026, the winning strategy is Architectural Independence.
The most forward-thinking banks are realizing they don’t need to rip out their mainframe to stay relevant. They are adopting the “Sidecar Strategy” (something my team has written about). They are standing up modern, cloud-native ledgers alongside their legacy cores to launch specific, high-growth verticals and partnering with new fintechs to help them. Things like:
- Want to support a gig-economy program? Don’t run it through the old core. Spin up a sidecar.
- Want to offer stablecoin (check out Lydia’s Fintech Forecast) settlement for local businesses? Don’t wait for the legacy vendor to build it. Partner with a cloud-native infrastructure provider.
This “Sidecar” approach allows a bank to innovate in weeks, not years. It creates a “speed boat” alongside the “cruise ship.”
The “Partner or Perish” Pivot: The New Embedded Banking Model
This brings us to the second major shift for 2026: The evolution of partnerships.
The collapse of the “Middleware BaaS” model in 2024/2025 was a painful but necessary forest fire. The bankruptcy of major middleware players like Synapse burned away the unsafe “rent-a-charter” practices that attracted regulatory wrath. The FDIC and OCC made it clear: banks cannot outsource their risk management to a software company.
What has emerged from the ashes is the new Embedded Finance model. In 2026, banks are doing more than “sponsoring” fintechs via a black box; they are integrating with them via Direct Visibility.
The “Platform Banks” of 2026 demand what we call the Glass House model. They utilize technology stacks that provide a shared, real-time ledger. The bank sees exactly what the fintech sees. Every transaction, every KYC check, every suspicious activity report is visible in real-time.
This regulatory compliance is actually a competitive advantage. Fintechs need banks more than ever to access payment rails and deposit insurance. Banks that can offer a compliant, transparent, API-driven partnership model are finding they can charge a premium for it.
The Forecast: The Era of the Specialist
2026 will be the year of the “Specialist Bank.” The generalist community bank model is fading. The banks that thrive will be the ones that pick a lane—whether it’s payments, crypto-settlement (“PSC-as-a-Service”), or niche commercial lending—and build the specific tech stack needed to dominate it.
We are already seeing this with banks partnering with companies to offer stablecoin settlement services to their commercial clients. It’s a service the big money center banks are too slow to offer to the mid-market, and it’s a massive revenue opportunity.
The “Zombie Banks” will keep waiting for the phone to ring. The “Platform Banks” will be too busy building API connections to notice.
