Tech gap: Soft switching confronts community banks

Soft switching, or the slow migration of a bank customer’s financial life to another institution, follows a pattern. A customer tries to make a faster payment and cannot, or they look for a financial tool their bank app doesn’t offer. Maybe they call their bank, but wait on hold, perhaps more than a few minutes. In this ‘right now’ service environment, they may not hold for long. And therefore they move on, without ever closing their existing accounts. Instead they open an account elsewhere online that happens immediately. In 2026, some evidence is showing soft switching is a problem at community banks..According to the 2026 J.D. Power U.S. Retail Banking Satisfaction Study, 20 percent of retail banking customers are now soft switching in some way, up from 17 percent last year.An Integris 2026 Banking Trust and Technology Report draws on surveys of banking executives and 1,000 bank customers. The report shows a gap between what customers expect and what many community banks are delivering. The Independent Community Bankers of America took notice of this study.“As community banks navigate 2026, one theme stands out clearly across the industry: Technology is advancing faster than institutions can govern it, communicate it, or fully understand its true cost,” the ICBA said in a statement. “The [Integris study] reveals a widening gap between what customers expect and what many banks can operationally deliver. For community banks, this gap is particularly important. While customers continue to place high trust in local institutions, that trust is increasingly fragile, influenced by cybersecurity visibility, AI decision making, and the perceived maturity of a bank’s technology infrastructure.”One translation of this is that while customers continue to place high levels of trust in local institutions they will still migrate to less-trusted nationwide banks or alternative financial companies for certain products. Trust alone is not winning over customers.The technology problem facing community banks is not simply one of willpower or strategy—it is one of resources. Budgets for technology at the largest banks dwarf those of community banks. That’s no secret. Maintaining a competitive AI-driven banking platform is not only something that goes against the grain of community banking, it carries an expense many can’t afford. AI platforms, fueled by stock investments, are now coming back to Earth and starting to charge more per hour to match what data centers actually cost to operate. According to the Integris study, 45 percent of community bank leaders expect their tech budgets to rise 40 percent in 2026, yet 64 percent say they lack full visibility into their total IT spending.This creates a double whammy: Community banks that try to keep pace by incrementally upgrading legacy systems are often spending a lot of money without meaningfully improving the customer experience.According to these surveys, the tech shortfall for community banks appears most evident in instant payments. The Integris study suggests 55 percent of community banks claim to have modernized many systems, but also that legacy core systems do not fully support seamless peer-to-peer transfers, bill payments and other business payment methods. A customer who cannot get the payment experience they want from their community bank will get it elsewhere, and that is one example of where soft switching begins.Once again community banks are confronted by an identity crisis. Banks that cannot match the digital onboarding experience, mobile functionality and payment speed of competitors are not losing customers through any failure of trust, relationship or community commitment. Consumers have simply become accustomed to certain services being on-demand.What’s the path forward? Community banks need to treat technology as the front line of customer retention. They can either invest in improving those capabilities or work with fintech partners that can help. Fintech partnerships offer a practical route. The task then becomes finding the right partner that keeps banking local while giving it tools to keep customers from soft switching.The urgency to keep up with more nimble online financial services is real. Customers now expect reliability not just in personal relationships, but in data protection, speed and transparency. Community banks that cannot deliver on these fronts will potentially see their customers stay on the books while actually banking somewhere else.Community banks still have an ace in their hand to build on with frontline tech: Customers tend to like their bank and would rather stay put. From the Integris survey: “Nearly 9 in 10 customers say they trust their bank to protect their personal and financial data, which is an extremely high confidence level.”