Quarterly Economic Report – Q4 2025
The Federal Reserve reported economic activity changed little on balance since the previous report, with three Districts reporting slight to modest growth in activity, five reporting no change, and four noting a slight softening. Overall consumer spending, particularly on retail goods, inched down in recent weeks, although auto sales were boosted in some Districts by strong demand for electric vehicles ahead of the expiration of a federal tax credit at the end of September. Demand for leisure and hospitality services by international travelers fell further over the reporting period, while demand by domestic consumers was largely unchanged. Nevertheless, spending by higher-income individuals on luxury travel and accommodation was reportedly strong. Several reports highlighted that lower- and middle-income households continued to seek discounts and promotions in the face of rising prices and elevated economic uncertainty. Manufacturing activity varied by District, and most reports noted challenging conditions due to higher tariffs and waning overall demand.
Activity in agriculture, energy, and transportation was generally down among reporting Districts. Conditions in the financial services sector and other interest rate-sensitive sectors, such as residential and commercial real estate, were mixed; some reports noted improved business lending in recent weeks due to lower interest rates, while other reports continued to highlight muted activity. The outlook for future economic growth varied by District and sector. Sentiment reportedly improved in a few Districts, with some contacts expecting an uptick in demand over the next 6 to 12 months. However, many others continued to expect elevated uncertainty to weigh down activity. One District report highlighted the downside risk to growth from a prolonged government shutdown.
The Federal Reserve Beige Book, October 15, 2025
Future of Banking: Navigating Change
On June 5, 2025, the Federal Reserve Bank of Kansas City hosted the “Future of Banking: Navigating Change” conference. The one-day event gathered academics, bankers, and state and federal policymakers to discuss issues of importance to U.S. banks—especially community banks. The conference featured four panel discussions examining funding, payments, third-party relationships, and the continued importance of relationship banking. Throughout these discussions, a compelling theme emerged: Although community banks face challenges, such as rising funding pressures and difficulty attracting talent, they also have opportunities to leverage their competitive advantage as technologies such as faster payments and third-party partnerships help level the playing field with larger institutions. The evolving landscape for community banks offers unprecedented opportunities for them to deepen existing customer relationships and strategically expand their reach to new markets.
Rising funding pressures in recent years have increased competition for depositors, presenting challenges for banks in general and community banks in particular. Community banks compete for depositors not only with nonbanks but also with larger banks, which can often offer customers greater convenience and perceived relative safety to the extent that they are seen as “too big to fail.” While some banks are seeking to replace deposit outflow with other, more expensive funding sources, putting pressure on bank margins, other banks are leveraging their relationships and service quality to try to attract depositors away from other institutions. For example, some panelists suggested that a responsible expansion of FDIC insurance (similar to an option described in FDIC 2023), together with increasing public awareness that bank deposits are safer than funds held by (uninsured) nonbanks, could encourage depositors to migrate their deposits back into smaller banks.
In addition, community banks may be able to attract larger, otherwise uninsured deposits by offering more branch services and using reciprocal deposit networks. In some cases, a properly structured merger applications policy could help keep funding in local markets. However, even community banks that maintain their deposit base are facing rising funding pressures: The 2024 CSBS Annual Survey of Bankers found that deposit costs were the largest external risk for bankers. In addition to funding pressures, community banks have also faced challenges attracting new talent. To address this challenge, some banks have proposed framing banks as technology companies or granting young workers more autonomy. Panelists suggested workers tend to value some decision-making authority, and that young professionals should be given more challenges and “room to fail.” In addition, panelists suggested that increasing employees’ sense of ownership (for instance, through offering shares) could yield a more motivated workforce and strengthen the connection between employees’ work and company performance. Although new technologies such as faster payments may also present some near-term challenges for community banks, they are likely to present substantial opportunities for these institutions as well. Faster payments technologies, particularly services such as FedNow, are increasingly shaping banking behavior, driven primarily by customer demand for speed and convenience. These technologies are likely to disrupt the payments industry and displace other payments infrastructure, such as small-dollar wires and certain automated clearing house (ACH) items. Moreover, they are likely to present new fraud management challenges, as faster payments are irrevocable by design. Panelists stressed the importance of layered protections and gradual capability expansions in meeting these challenges.
However, they also pointed to one benefit to fraud management: Replacing the trillions of dollars in paper checks processed annually with more secure instant payments is likely to reduce fraud risk for both customers and banks. Faster payments are likely to have several other benefits for community banks. While some banks initially adopted instant payment technologies out of fear that financial technology (“fintech”) competitors would draw customers away, many have since found that customers still value their primary bank accounts. Indeed, panelists reported that many businesses are, and a wide variety of other products and services, present similar opportunities for banks to tailor their services to an evolving customer base. Panelists stressed the need for banks, in pursuing third-party relationships, to consider not only the cost benefits from these partnerships, but also the convenience. This consideration was illustrated with an anecdote about an online mortgage company that offered mortgages that were generally more expensive than those from traditional banks. Despite its higher cost, the online mortgage company appealed to some borrowers because it could approve them quickly and process applications outside of traditional business hours.
With large-scale demographic changes set to release a potential “silver tsunami” of generational wealth transfer, third-party service providers may become more strategically important to community banks as they aim to remain competitive for the next generation of retail and small business customers. Making the most of these third-party partnerships will require both data analytics and due diligence. For instance, some panelists suggested banks leverage demographic data about their customer base to tailor products and service offerings to their customers’ unique needs at various life stages. In one example, panelists explained how data on electronic payment traffic, typically available from a bank’s core provider, could show bank management where money is going, such as to faster payment applications or wealth management platforms. This insight could help banks understand where to consider third-party partnerships. In addition, panelists emphasized the importance of assessing the risk of these partnerships early in the development phase—in particular, the importance of understanding the roles and responsibilities for ongoing compliance requirements, such as with the Bank Secrecy Act.
Both faster payments and third-party partnerships may enable community banks to lean on the value proposition of relationship banking. While large banks enjoy marked economies of scale, the growth and scalability of technology itself will eventually level the playing field, allowing community banks to offer many of the same benefits as larger banks to their customers. In this environment, community banks may be better positioned to leverage their “soft information” advantage. Community banks often have greater access to “soft” or qualitative information about borrowers and markets through their personal relationships, an advantage that is difficult for large banks to scale. This information may help community banks uncover hidden opportunities or insights about their customer base, allowing them to attract and retain younger customers.
Alcazar J., Fitzgerald N., Jacewitz S., March W.B., Ziadeh S., “Future of Banking: Navigating Change” Federal Reserve Bank of Kansas City, August 27, 2025
Did You Know?
- Strategic planning season is coming to an end, but there is still time left. Email Jim Adkins at [email protected].
- Check out Barry Wides’ newest Artisan Insight article: Understanding Opportunity Zone 2.0: Key Changes and Bank Strategies
- Have you reviewed your card contracts lately? You should. Mike Elliott can help – [email protected]
- Need some compliance advice? Reach out to Dan Bagus at [email protected]
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