As we enter April, multiple core assumptions in banking are being challenged at once. From interchange fee regulation moving to the state level, to rising fraud fueled by AI, to geopolitical risks spilling into cybersecurity, the operating environment is anything but predictable. Even long-standing systems like check clearing are now under review, reinforcing that both legacy infrastructure and future strategy are in flux. How do community bankers adjust their strategy? Read on for the full analysis
The Federal Reserve's December request for information (RFI) on the future of its check clearing services has drawn strong pushback. Community banks are worried the central bank may be laying the groundwork to exit check processing entirely. The RFI laid out four scenarios, ranging from maintaining the status quo to phasing out Fed check services altogether, an option that community bankers have taken to calling "the nuclear option." The underlying economics are driving the inquiry: the Fed's check processing infrastructure is nearing end-of-life, and with check volumes continuing to decline, the fee model required to sustain the system is becoming increasingly difficult to support. However, millions of people still use checks, and bankers warn an abrupt end to checks could cause havoc. Community bankers are calling for investment in better check-clearing technology to address rising check fraud.
The concern isn't only about the long-term future of checks. President Trump signed an executive order last year mandating a shift from paper checks to electronic funds transfers for all federal payments, and some bankers worry the administration may move faster than businesses and consumers are prepared for, drawing comparisons to the disruption caused by the abrupt elimination of the penny. Large banks and industry trade groups have called for a managed transition, with the ABA and Consumer Bankers Association jointly urging the Fed to approach any wind-down with reasonable timelines, adequate public input, and robust alternatives in place.
Community institutions are disproportionately exposed here: checks remain a routine part of daily operations for rural customers, small businesses, churches, and older Americans, which are segments that community banks and credit unions serve in higher concentrations than large institutions. The check fraud dimension adds another layer of complexity. Community banks often absorb losses when checks deposited by their customers are later returned as fraudulent, and many have been calling for better clearing infrastructure, not less of it, as a tool for combating the problem. How the Fed ultimately responds to the 333 comment letters it received will have real operational and cost implications for smaller institutions, particularly if any transition timeline does not allow adequate runway for customers and systems to adjust. Stay tuned.
A growing number of U.S. states are advancing legislation aimed at limiting or restructuring interchange fees, particularly on sales tax and gratuity portions of transactions. Illinois has already passed a law set to take effect in July that would prohibit interchange fees on taxes and tips. The stakes extend well beyond Illinois. Nearly a dozen states have pursued similar legislation, with Delaware and Colorado both advancing bills out of committee this month.
Merchant groups argue these laws address long-standing concerns about fee transparency and cost burdens, especially for small businesses. Card networks and banking groups, however, are pushing back, warning that a patchwork of state-level rules could create operational complexity, legal uncertainty, and potential conflicts with existing federal frameworks governing payments systems.
Interchange has historically been a stable source of non-interest income, particularly for smaller institutions that rely on debit card programs. If state-by-state restrictions take hold, community FIs could face margin compression and increased compliance complexity, especially if card processors and networks need to support fragmented rules across jurisdictions.
More broadly, this signals a renewed push to regulate fee economics at the state level, not just federally. Community banks and credit unions should be watching closely, as even targeted changes (like excluding taxes or tips) can ripple through card program economics, vendor relationships, and pricing strategies.
If the Seventh Circuit rules before July 1 and reinstates an injunction, the immediate pressure eases, but the broader legislative trajectory, with bills advancing in multiple states, suggests this is a policy question that is not going away.
The U.S.-Israeli military campaign against Iran has created a cluster of interconnected risks for the banking sector that are still evolving. The most direct and immediate concern is cybersecurity. Following a missile strike on Iran’s state-owned Sepah Bank, Iran's military leadership explicitly singled out U.S. financial institutions as cyber attack targets, elevating what had previously been a diffuse threat environment into a direct, state-level declaration. Threat intelligence firm Unit 42 tracked approximately 60 active hacktivist groups, which had already claimed attacks on regional financial infrastructure, including the websites of Riyadh Bank and the Bank of Jordan. While the near-term threat from these groups are likely low-to-medium in significance, activity can escalate in the weeks ahead.
Beyond cybersecurity, the conflict is introducing friction into two other areas: M&A and interest rates. Bank merger activity, which had been surging, may experience setbacks, as war-related volatility puts pressure on bank stock prices, which serve as the primary acquisition currency in most recent deals. On rates, the Federal Reserve held its benchmark rate steady at its March meeting, as higher energy prices pushed inflation forecasts upward.
For community institutions, the effects are largely indirect but worth monitoring across several fronts. The most immediate concern is cybersecurity. Unlike traditional geopolitical risks, cyber campaigns tied to nation-state conflicts do not differentiate by institution size. Even smaller banks can become targets of opportunistic attacks or collateral disruption, making it important to revisit incident response plans, vendor dependencies, and external-facing systems.
There are also second-order effects to watch. A potential slowdown in bank M&A could delay strategic plans for institutions considering acquisitions or exits. At the same time, shifting rate expectations tied to energy-driven inflation may affect deposit pricing strategies and net interest margin forecasts for the rest of the year.
Global illicit financial activity reached an estimated $4.4 trillion in 2025, according to a Nasdaq Verafin report, which is a 19.2% annualized increase since 2023. Criminal networks are using AI to scale highly sophisticated scam operations and professional money laundering syndicates, and the FBI reported that internet crime losses hit a record $16.6 billion in the U.S. in 2024. The Association for Financial Professionals found that 79% of corporate organizations encountered attempted or actual payments fraud that year, and business email compromise has become the most common vector.
The policy response is taking shape at both the legislative and executive levels. President Trump signed an executive order in early March directing a comprehensive review of tools available to combat transnational cybercrime and fraud, requiring an action plan identifying criminal organizations and solutions to take down their operations, and directing the attorney general to prioritize prosecution of cyber-enabled fraud.The order came the day after a House Financial Services subcommittee hearing where bank and credit union executives pressed for a national strategy, specifically for legislation that would allow financial institutions to share fraud-related data across institutions in a structured, secure way.
Community institutions are feeling this directly: one community bank CEO testified that fraud losses at her institution now exceed loan losses, with check fraud and AI-enabled impostor scams among the primary culprits. The scale of the problem reinforces what industry advocates have been saying for some time: no single institution can address this alone. Compliance professionals are calling for clearer regulatory guidance on using AI for detection, with some noting that the absence of that guidance is allowing criminals to outpace defenses. The executive order and the proposed information-sharing legislation, if they advance, could meaningfully change the operating environment for fraud prevention, though how quickly either translates into practical tools for community institutions remains to be seen.
Our Co-Founder and Chief AML Officer Sarah Beth Felix offers some initial exercises to help community FIs apply the recently released U.S. Treasury Risk Assessments: Money Laundering (ML), Proliferation Financing (PF), and Terrorist Financing (TF). Read it on her weekly newsletter Dirty Money Weekly
On the other end of the spectrum, banks are testing AI to boost productivity. HSBC this week appointed its first Chief AI Officer, while charging its Chief Technology Officer with the mandate of modernizing core platforms and build a central AI banking platform for staff access. Meanwhile, U.S. Bank's design team has been using an internally developed AI tool, Design Assistant, since December. The tool, which is built to work within the bank's existing Figma environment and trained on internal brand, content, and accessibility standards, has seen about 90% adoption among the bank's hundreds of designers. At the big-bank level, Bank of America has said its AI-powered virtual assistant Erica handles the equivalent work of about 11,000 people, and all 18,000 of its software developers use coding agents that they say have boosted productivity by roughly 20%.
The returns, however, are harder to measure than the momentum. Wells Fargo analyst Mike Mayo cautioned that AI is "a long, expensive and risk-constrained transformation" and noted that no notably new products or services have yet emerged from AI in banking. JPMorgan's AI-generated savings of roughly $2 billion annually are approximately equal to what the bank spends on the technology each year, and almost no other bank discloses comparable figures, raising questions about what returns the industry is actually realizing. A March report from Capgemini found a similar pattern at the institutional level: more than 80% of corporate and investment bank executives said new product implementations aren't boosting revenue, and 51% said they haven't delivered expected cost savings, with legacy systems consuming 43% of IT budgets, leaving only 29% available for transformative technologies.
The key takeaway is that AI momentum does not equal ROI. Even large banks are still struggling to turn investment into meaningful revenue or cost savings, which raises the bar for smaller institutions with tighter budgets.
Legacy infrastructure remains a core constraint, making broad AI deployments difficult without better data, integration, and workflow consistency. At the same time, a crowded vendor landscape means many tools lack clear, proven outcomes.
The more practical path may be more targeted, in narrow use cases embedded in existing workflows, where results can be measured quickly. In this environment, discipline around where AI is applied for productivity gains may matter more than speed of adoption.
In last month’s edition of the Community Banking News Update, we covered two rules to cut regulatory burden for community banks, and why community banks are leading on customer satisfaction. Missed it? You can read it here.
Acceleron is a modern correspondent banking platform that empowers community banks and credit unions to automate international wire transfers, capture non-interest income, and compete more effectively with big banks. With a foreign exchange (FX) marketplace and currency conversion engine, Acceleron’s API-first infrastructure helps institutions turn cross-border payment flows into efficient, revenue-generating opportunities. Serving over 200 financial institutions and facilitating more than $1 billion in international payments annually, our correspondent banking services and international payment automation solutions are pre-integrated seamlessly with Fiserv Payments Exchange, Braid, and other leading payments platforms.
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