Small and regional banks play an outsized role in the U.S. financial system, particularly in local economies, extending credit to small and medium-sized businesses and often providing more personalized customer service. Long distinguished by their deep customer relationships and local knowledge, these institutions are currently facing new challenges and opportunities as the public increasingly turns to digital solutions.
The industry’s shift to digital has ushered in a growing need for seamless data connectivity—one that allows consumers to easily and securely share their financial data across the platforms they trust. Broadly known as open banking, the concept often evokes perceptions of regulation or disruption, but its real effect on banks, particularly small and regional ones, lies in the foundational benefits it can provide: improved access, stronger security, and user-centric innovation.
Ultimately, open banking is a way for these banks to strengthen trust, stay relevant, and deliver better financial outcomes in an ecosystem growing more interconnected by the day.
I think the biggest thing facing banks is that the basis of competition has changed from the three or four banks in your neighborhood to every single bank nationally.
Matthew Quale, President of the Digital Bank, Forbright Bank
What is open banking, really?
At its core, open banking is about secure data access and interoperability. While often associated with regulatory initiatives like the U.K.’s Open Banking standard or the EU’s PSD2, open banking in the United States has taken a market-driven approach—making it less about mandates and more about empowering consumers to use their financial data where and how they want.
For bank customers, this means easier access to online money management, more streamlined interactions with their financial institutions, and generally a more open, accessible financial ecosystem. Using standardized APIs, tokenized authentication, and user-permissioned data sharing, open banking moves away from outdated methods like screen scraping and facilitates a safer, more transparent exchange of financial information. In 2025, our consumer research showed that 70% of consumers feel comfortable sharing their data with the digital tools they use.
For small and regional banks, open banking represents an opportunity to be part of this shift in a way that aligns with their core values: service, trust, and customer-first thinking.
Why it matters for small and regional banks
Small and regional banks are uniquely positioned to provide a high-touch service that national banks often cannot. They’re also vital to the economy: community banks alone, for example, account for 60% of small business loans in the U.S. By embracing open banking, small and regional banks can preserve what makes them unique, while equipping themselves with the tools to operate effectively today.
Our customers have higher and higher expectations. They don't look at financial services in a silo. They compare it to every other app they have. Their expectation for digital banking is the same they have for everything else: best in class, speedy, convenient, easy to use, and mobile first.
Matthew Quale, President of the Digital Bank, Forbright Bank
Concretely, it can help them:
1. Grow deposits through more streamlined account opening
A first impression often happens online. If opening an account is slow, confusing, or riddled with manual steps, customers may walk away—or worse, go elsewhere. Open banking helps simplify the process by enabling real-time account authentication and account ownership verification.
With secure access to consumer-permissioned data, banks can pre-fill applications, verify identities, and instantly fund new accounts with minimal friction. This is especially crucial for digital natives: according to a study, 72% of Gen Z would rather open a bank account online than visit a branch.
2. Stay competitive through smarter lending
Credit decisioning has long been a stronghold of smaller banks, but traditional underwriting methods can often be slow, manual, and paper-heavy—not to mention inaccessible for thin-file or non-traditional borrowers. Tools powered by open banking help digitize and streamline the process while giving lenders access to real-time, consumer-permissioned income and transaction data for a fuller, more accurate picture of financial health.
This unlocks faster approvals and allows lenders to reach borrowers who might not qualify under traditional models. In fact, FICO found that cash flow data, like recurring income and consistent bill payments, can improve credit access for an estimated 27 million Americans.
3. Fight fraud with real-time data
Fraud mitigation is a top priority for every financial institution, but smaller banks often face resource constraints. According to the Federal Reserve, fraud costs the U.S. economy billions each year, with small institutions often being disproportionately impacted.
Open banking tools offer small and regional banks new ways to detect and prevent fraud through real-time account data and behavioral insights. Tokenized, permissioned access to verified financial data, for example, allows banks to confirm account ownership and reduce risk for activities like ACH transfers, bank payments, and new account funding.
By adopting open banking standards and working with trusted partners, banks can reduce their exposure to fraud while enhancing customer trust.
4. Improve payments with modern rails
Traditional payment rails, such as ACH and wire transfers, can be slow and error-prone. Open banking helps modernize this infrastructure by supporting account-to-account (or “pay-by-bank”) payments that are faster, more reliable, and more cost-effective.
Whether it's collecting bill payments, transferring funds between accounts, or disbursing loans, open banking APIs enable instant account verification and reduce failed payments due to incorrect routing or account numbers. Among consumers who have used pay-by-bank solutions, 80% cite ease as a key factor in their usage.
For small and regional banks, this offers a new way to deliver value—lowering processing costs while enhancing the speed and reliability of everyday financial interactions.
Trust and safety: the common thread
Trust is the foundation of every bank relationship. In an era of digital transformation, that trust must extend to data security and transparency. Open banking frameworks are built on consent, control, and clarity, allowing consumers to choose what data to share, with whom, and for how long.
By working with secure data partners, banks of all sizes can ensure their customers’ financial information is protected while providing the seamless connectivity they increasingly expect.
Customers want to do business with brands that they trust and share values with. That's where community and regional banks excel; we can demonstrate that we're present in our communities and know our customers deeply.
Jonathan Hartsell, Head of Digital at First Horizon
A new chapter for banking
Open banking isn’t just a tech upgrade, it’s a strategic enabler. By embedding secure, user-permissioned data sharing into their offerings, small and regional banks can deliver digital convenience without compromising the trust they've spent decades building.
This isn't about trading relationships for automation. It’s about enhancing those relationships with better tools so customers get faster access to credit, easier ways to open and fund accounts, and payment experiences that match their expectations. At the same time, banks gain new safeguards against fraud and a modern foundation for growth.
Open banking gives small and regional banks a way to scale their strengths—service, security, and stewardship—into the future of finance. Those who act now won’t just adapt to change. They’ll help define what trusted, customer-first banking looks like in a connected era.
Customers have more financial relationships than they used to. The ability to move money seamlessly across those relationships, so that the customer can bank when and where they want, is where we've focused and are leveraging Plaid’s capabilities the most.
Jonathan Hartsell, Head of Digital at First Horizon