In a significant shift toward rebalancing the power dynamic between financial institutions and the technology firms that power them, federal banking regulators have announced a robust new initiative to increase oversight of third-party core service providers. The Federal Deposit Insurance Corporation (FDIC), the Federal Reserve, and the Office of the Comptroller of the Currency (OCC) issued a joint statement this week signaling that they will no longer tolerate business practices that hinder community banks from performing essential due diligence or negotiating fair contract terms. This intervention marks a pivotal moment for community banking organizations (CBOs), which have long argued that the monopolistic nature of the core banking software market leaves them vulnerable to unfavorable terms and operational blind spots.
The regulatory push arrives as the financial services sector faces increasing pressure to digitize operations while simultaneously grappling with a highly consolidated vendor landscape. By issuing this joint statement, the federal agencies are effectively putting the nation’s largest core providers—companies that often hold a dominant share of the market—on notice that their contractual constraints and limited transparency will now be subject to heightened regulatory review.
A Market Defined by Concentration and Limited Choice
The foundation of this regulatory move lies in the extreme concentration of the core processing industry. For decades, community banks have relied on a handful of massive technology providers to manage the back-end infrastructure of their institutions, including deposit systems, loan processing, and general ledger management. Because these systems are deeply integrated into every aspect of a bank’s operations, switching providers is a prohibitively expensive and technically complex endeavor.
Data from industry analysts suggest that the top three providers in the United States currently command a vast majority of the community banking market share. This oligopolistic environment has created a scenario where small, regional banks often have little leverage during contract negotiations. When a core provider dictates rigid terms, restricts access to data, or fails to provide the necessary documentation for a bank’s own regulatory audits, the bank is essentially left without recourse. The agencies’ new stance addresses these specific grievances, noting that these barriers "unreasonably limit" a community bank’s ability to manage its risk profile effectively.
Chronology of the Regulatory Shift
The road to this week’s announcement has been paved with years of industry advocacy and incremental policy adjustments. The evolution of third-party risk management (TPRM) can be traced back to the early 2000s, when banks first began outsourcing core functions to third-party providers.
- 2013: The OCC issued Bulletin 2013-29, which established the foundational expectations for third-party risk management, emphasizing that banks remain responsible for all activities performed by third parties.
- 2021: As cyber threats intensified, the interagency focus shifted toward the resilience of critical infrastructure. Regulators began hosting roundtables with the American Bankers Association (ABA) to discuss the "chokepoint" effect of core providers.
- 2023: The interagency guidance on third-party relationships was finalized, providing a unified framework, yet community banks continued to report that core providers were not consistently cooperating with these new standards.
- 2026 (September): The current joint statement and the proposed joint guidance—developed in coordination with the National Credit Union Administration (NCUA)—represent the most direct regulatory attempt to hold the providers themselves accountable for contractual fairness, rather than solely blaming the banks for failing to manage the risks of their vendors.
The Mechanism of Enhanced Oversight
Under the new policy, federal regulators will examine three primary factors when supervising core provider services. First, they will assess the level of transparency provided to the client bank regarding operational performance and security. Second, they will evaluate the fairness and flexibility of contract terms. Third, they will monitor the provider’s responsiveness to audit requests.
This is a departure from previous practices where the regulator’s primary role was to inspect the bank’s management of the vendor. Now, if a regulator finds that a core provider is actively blocking a bank’s ability to perform its due diligence, the agency may choose to engage directly with the provider. In cases where safety and soundness are threatened—or where federal law is violated—the agencies have signaled that they will utilize their full statutory authority to bring enforcement actions. While the agencies did not specify the exact nature of these potential penalties, industry experts expect them to range from formal administrative orders to mandated changes in contract disclosure practices.
Proposed Guidance on Risk-Based Tailoring
In tandem with the oversight statement, the regulators have proposed new joint guidance that aims to modernize how financial institutions categorize and manage third-party risk. The objective is to move away from a "one-size-fits-all" approach to vendor management, which has historically been a source of immense administrative burden for smaller community banks.
The proposed guidance encourages institutions to align their oversight efforts with the "reasonably assessed" risk levels of each relationship. For a small community bank, this means that a vendor providing a low-risk service—such as an automated newsletter platform—would not require the same level of intensive oversight as a core provider managing the bank’s primary ledger. This shift is intended to allow banks to allocate their limited compliance resources more effectively, focusing their energy on the relationships that carry the highest operational and security risk.
The public comment period for this proposed guidance is set for 60 days following its publication in the Federal Register. Regulators are particularly interested in hearing how community banks can better balance the need for rigorous security with the practical realities of their size and technical complexity.
Implications for the Financial Ecosystem
The broader implications of this regulatory intervention are likely to be profound. For core providers, the era of "take it or leave it" contracts appears to be closing. If these firms are required to offer more transparent terms and better data access, it could lead to increased operational costs for them, which may eventually trickle down to the banks. However, many in the industry argue that this is a necessary cost of doing business in a modern, secure financial environment.
For community banks, this represents a significant victory for the American Bankers Association’s Core Platforms Committee, which has lobbied extensively for this kind of federal intervention. By leveling the playing field, regulators hope to foster a more competitive and secure environment where banks can innovate without being shackled by outdated or restrictive vendor agreements.
Furthermore, the involvement of the NCUA in the proposed guidance ensures that credit unions—which face many of the same technological challenges as community banks—are also covered by the new risk management framework. This unified approach suggests that federal regulators are committed to maintaining a consistent standard of safety across the entire banking sector, regardless of the size or charter of the institution.
A Path Toward Greater Accountability
As the financial landscape becomes increasingly digital, the resilience of the third-party providers that underpin that landscape has become a matter of national security. When a core provider experiences an outage, a data breach, or a service failure, the impact is felt not just by the banks, but by the consumers who rely on those institutions for their daily financial needs.
By formally pledging to scrutinize the business practices of these providers, the FDIC, Federal Reserve, and OCC are acknowledging that the traditional model of third-party risk management is insufficient for the current threat environment. The success of this initiative will ultimately depend on how aggressively the agencies enforce these new expectations. However, by providing a clear framework and establishing the intent to hold both banks and their vendors accountable, the regulators have set a new course that emphasizes transparency, fairness, and, above all, the safety and soundness of the American financial system.
As the industry prepares to respond to the proposed guidance over the next two months, all eyes will be on how the major core providers adjust their contractual strategies. For community banks, the prospect of having a federal regulator as an ally in their negotiations is a welcome development, promising a future where their operational autonomy is better protected against the influence of the vendors they depend on.
