The news: Community banks are becoming even more important to segments of the economy that large banks struggle to serve—even as their share of industry assets continues to decline—according to a new Kansas City Federal Reserve report. Technological advances are making it easier for smaller institutions to compete without sacrificing the relationship-based banking model that differentiates them.

Zooming in: Community banks' share of US banking assets fell from 28.3% in 2000 to 13.5% in 2020. Yet they continue to play an outsize role in local lending. And according to the Kansas City Federal Reserve, as of 2020, they operated nearly 72% of rural bank branches, held about two-thirds of rural deposits, and were the only commercial banking presence in a quarter of US counties. 

In addition, community banks account for 81% of farm real estate debt and 74% of agricultural operating loans held by commercial banks. 

Why it matters: Community banks are being squeezed from multiple directions: Larger banks continue to outspend them on technology and product breadth, while industry consolidation is creating larger regional competitors with greater scale. 

At the same time, younger consumers increasingly expect seamless digital experiences and are less persuaded by traditional community banking value propositions. As digital capabilities become more accessible, technology is no longer the primary barrier to competing—making it even more important for community banks to differentiate themselves through local expertise, specialized lending, and relationship banking.

Implications for banks: Historically, scale gave large banks a meaningful competitive advantage, because only they could afford sophisticated digital infrastructure. That advantage is narrowing as AI, cloud technology, fintech partnerships, and banking as a service solutions become more accessible. 

Community banks have an opportunity to modernize operations and improve the customer experience without abandoning their relationship-based model. The institutions most likely to succeed will use technology to deepen their niche rather than try to become smaller versions of national banks.

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