Half-baked modernization is no longer an option for commercial banks

Commercial banks own high-value relationships within their firms, but legacy systems, fragmented operations, and incremental tech investments are holding them back. They must seriously up their digital game to meet the broad B2B needs of corporates, commercial clients, and small and mid-sized enterprises, each with unique and highly customized requirements.

This modernization or transformation is entirely different and far more complex in the B2B space. Compared to retail banking, a sexy app does not win the day in commercial banking. Commercial banks should balance foundational modernization initiatives between practical platform solutions and custom builds. Service providers have a critical role to play in enabling this reality.

Our recently published assessment, HFS Horizons: The Best Service Providers for Commercial Banks, 2025, revealed that the sector desperately needs modernization but remains bogged down by extenuating circumstances that impact budgets and solution extensibility.

Exhibit 1: The major themes in commercial banking are the high impact of macroeconomics, unique CX requirements, and buy-and-build need to modernize

Source: HFS Research, 2025

HFS notes three major trend themes in commercial banking (see Exhibit 1):

1. Macroeconomic mixed bag: Winds of opportunity and challenge

The current high-interest-rate environment has been a double-edged sword for commercial banks. On one side, rising rates, unseen in over 15 years, unlocked new profit potential, notably in net interest income. Conversely, costlier borrowing curtailed loan demand, while fierce competition for deposits forced banks to offer premium rates, thinning margins and straining overall profitability.

2. Customer experience (CX) in commercial banking: A 24/7 capital clarity mandate

Unlike the flashy world of B2C retail banking, commercial banking CX is rooted in the precision of B2B demands, requiring 24/7 capital transparency and seamless operations. Clients expect secure, straight-through processing. Banks are blending automation with human insight to digitize front-end journeys while preserving expert-led service. Top CX priorities 2025 include smart onboarding, omnichannel access, and real-time, 360° liquidity visibility across banks.

3. Modernization through a blend of build and buy

Commercial banks modernize core functions, such as lending, treasury, and trade finance without relying on fully bespoke builds, a marked shift toward commercial off-the-shelf (COTS) platforms for standard needs. Where legacy systems lag and upgrades fall short, banks opt to ‘build to extend,’ using APIs, microservices, and modular tools to layer innovation atop aging infrastructure, delivering agility without full-scale overhauls.

Exhibit 2: Commercial banks prioritize improving digital hygiene to reduce costs, improve operations, and elevate CX

Sample: N = 36 commercial bank respondents
Source: HFS Research, 2025

Commercial banks are now realizing functional digital and optimization outcomes from their service providers. These outcomes are aligned with Horizon 1 values (see Exhibit 2): driving cost reduction, speed, and efficiency. In two years, they will continue focusing on functional digital transformation to strengthen digital hygiene. However, mere point transformation is not enough.

These banks should overcome data silos across the front, middle, and back offices to achieve enterprise transformation and seek new sources of value. Only a third of commercial banks are tapping into their service providers to support end-to-end transformation. This number must go up with the increase in competition; commercial clients diversifying their relationships across banking institutions, non-bank lenders, and nimble fintech are gaining ground. Thus, commercial banks must plan for end-to-end transformation to enable operational resilience and agility, allowing them to rapidly respond to the evolving market demand or lose their share of the pie to technologically advanced players.

Moreover, technology advancements drive deeper integration of complex functions and reduce dependency on manual labor. After two years, the most significant value shift is toward ecosystem transformation. Commercial banks want to leverage their modernization initiatives to help them expand their footprint and increase their relevance to commercial customers with broader and real-time liquidity offerings, non-banking services such as insurance, and other ecosystem plays.

Platforms, CX, compliance, and AI drive banking, but providers expect to stay ahead of the curve

As commercial banks advance across transformation horizons, service providers are stepping up to meet evolving demands. Our research reveals a strong alignment between banks’ priorities in digital innovation (Horizon 1) and modernization (Horizon 2) with the fastest-growing service offerings (see Exhibit 2). The top focus areas include modernization, CX, risk and compliance, and AI enablement (see Exhibit 1).

• Modernization is centered on platform implementations for core functions such as commercial lending and trade finance.
• CX in commercial banking goes beyond user-friendly interfaces; it includes faster onboarding, real-time payments, cash flow visibility, and quicker lending decisions. nCino implementations and enhanced onboarding are leading examples.
• Risk and compliance remain essential, with optimization efforts ongoing, particularly through AI. Regulatory developments in H2 2025 will likely influence future priorities.
• AI and GenAI are becoming key enablers across functions, powering both front-office (chatbots, dashboards, GenAI RM tools) and back-office operations (loan processing, fraud detection, compliance, KYC, treasury, and analytics). Foresight from service providers is critical as commercial banks face rapid technology shifts and regulatory complexity. System integrators must move beyond reactive delivery and proactively develop solutions anticipating future disruptions, especially cybersecurity, compliance, and AI. This proactive stance enables banks to stay ahead of operational risks and maintain competitive agility.

A compelling example of emerging tech in action comes from a mid-tier service provider that developed a blockchain-based tokenization platform featuring smart contracts and a secure wallet system. The solution enhanced security and transparency, mitigated fraud risk, and helped a global corporate bank’s asset management unit attract institutional investors.

The Bottom Line: Commercial banks must embrace relentless modernization or risk losing relevance.

Enterprise leaders in commercial banking must abandon half-measures. The B2B landscape demands scalable platforms, bespoke digital solutions, and 24x7x365 liquidity and service. Commercial banks risk losing clients, margins, and market relevance without persistent modernization. Simply upgrading systems won’t cut it, as modernization agendas should overhaul CX and end-to-end operations.

Service providers are vital partners, but banks should demand a focus on outcomes and not just technology. Prioritize cost-cutting, operational efficiency, AI-driven innovation, and client-centricity to build a resilient, future-ready bank.