Modernization or bust: A critical moment for US mid-tier banks

Mid-tier banks face a critical juncture in 2025. Ninety-six percent of banks are investing heavily in payment modernization, but many still struggle to bridge the gap between ambition and execution. As fintech competitors introduce innovative solutions and larger banks leverage their substantial resources, mid-tier institutions must evolve their payment capabilities or risk falling too far behind the market. The pressure to modernize has never been more intense, yet the path forward requires careful consideration of technological capabilities and client needs.

Meeting client demands in a digital era

Business clients, particularly in the mid-market segment, are driving this urgency for change. With 89% planning significant payment technology improvements in the next 24 to 36 months, these clients present a prime opportunity for banks to strengthen relationships and develop new revenue streams. This client-side investment creates an unprecedented opportunity for banks to position themselves as essential partners in their clients' digital transformation journeys.

The challenges these businesses face are substantial: 54% cite costs as their primary modernization obstacle, while 45% struggle with IT resource demands. Mid-tier banks that can minimize these pain points while delivering innovative solutions will gain a significant competitive edge. Success requires delivering not just technology but integrated solutions that work seamlessly with clients' existing systems.

The fintech challenge and bank response

Fintech providers continue to displace banking relationships, with 43% of businesses citing real-time payment capabilities and 45% noting better system integration as key reasons for choosing fintech partners instead of their financial institutions. However, mid-tier banks maintain crucial advantages through their established relationships, regulatory expertise, and ability to provide personalized service at scale.

The most successful financial institutions are adopting a hybrid approach, combining traditional banking strengths with modern payments technology capabilities. This strategy allows banks to maintain their trusted advisor status while delivering the payment capabilities their clients demand. Selecting a trusted vendor partner to accompany them on this journey will help mid-tier banks meet these goals.

Opportunities and hurdles in ISO 20022

The ISO 20022 standard isn't just another technical upgrade; it represents a fundamental transformation in how financial data moves through the banking system. Many businesses are already ahead of banks in adoption readiness, creating an urgent imperative and strategic opportunity for mid-tier institutions.

The standard's rich, structured data format enables entirely new capabilities. Banks can leverage this enhanced data to deliver transformative services, particularly in fraud prevention and anti-money laundering compliance. By feeding structured data into artificial intelligence systems, banks can dramatically improve their ability to detect suspicious patterns while reducing false positives.

Beyond security, ISO 20022 opens new revenue opportunities through data monetization. Forward-thinking banks are developing value-added services like advanced cash flow forecasting and working capital optimization tools. These services transform payment modernization from a cost center into a revenue driver. Success requires viewing ISO 20022 not just as a compliance requirement but as a strategic opportunity to strengthen client relationships through innovative service offerings.

Cloud technology and strategic partnerships

The modernization of payment systems demands a foundation that can support rapid innovation and seamless scaling. Cloud technology provides this foundation, offering banks the flexibility to evolve their services quickly while maintaining the reliability their customers expect. Yet the transition to cloud infrastructure represents more than a technical upgrade; it requires a fundamental shift in how banks approach technology strategy and risk management.

For most mid-tier banks, success in this new era depends on choosing the right partners. Modern payment systems are too complex for any single institution to excel in every aspect. The most successful banks are those that focus on their core strengths while partnering strategically for technological capabilities. These partnerships work best when they extend beyond simple vendor relationships to become true collaborations, with both parties invested in driving innovation and improving customer outcomes. The key lies not just in finding partners with strong technical capabilities but in ensuring cultural alignment and a shared vision for the future of banking.

The road forward for mid-tier banks

Mid-tier banks stand at a pivotal moment. Those that successfully modernize their payment systems will thrive in an increasingly digital landscape, while those that delay risk permanent disadvantage. The path forward requires not just technical transformation but a fundamental shift in approaches to innovation, client relationships, and competitive strategy. With careful planning and strategic execution, mid-tier banks can turn the modernization challenge into an opportunity for sustained growth and competitive differentiation.

For more insights on these topics, please download the Datos Insights report:

The Importance of Modernization for Mid-Tier U.S. Banks