Heyday or Doomsday? Regulators, Banks at Odds Over CBDCs

The Federal Reserve asked the public for its thoughts on the need for a central bank digital currency (CBDC), and the banking industry has answered with a resounding “no.”

The comments came in response to the Fed’s report, “Money and Payments: The U.S. Dollar in the Age of Digital Transformation.”

While the Fed itself has been opposed and undecided, the idea has caught hold around the world, with China on the verge of taking its digital yuan live, India promising a digital rupee, and the European Union and European Central Bank (ECB) aggressively supporting a digital euro.

Here’s a look at the pros promoted by many central bankers and the cons spelled out by the banking business.

The Power of CBDCs

There are several arguments made by central banks and governments in favor of CBDCs, but the issue largely arose — at least on a global basis — in the wake of the fear of stablecoins competing with fiat currencies after Meta’s abortive 2019 effort to launch an unpegged stablecoin called Libra, which was later renamed Diem.

Here are some of the top arguments central bankers and elected officials make in favor of CBDCs:

  • Control is paramount: The stablecoin as a currency competitor has many CBDC proponents up in arms. Central bankers and governments say if citizens turn to privately issued stablecoins over fiat, they will lose the ability to oversee their own economies. That’s largely behind China’s move to create the digital yuan — and India’s push for a digital rupee.
  • They hold stablecoins at bay: This has a great deal of crossover with control, but it’s worth noting that China and India have banned stablecoins — and any other cryptocurrencies — for payments. And China has banned crypto outright while India came close and is cracking down on crypto trading.
  • They insulate economies: One reason that control is needed, many central bankers say, is that if people turn away from the national currency, the governments will lose vital tools to fight off inflation and economic downturns.
  • They facilitate real-time payments: A CBDC would almost by definition require that transactions are available around the clock and every day of the year, and it would also allow for real-time transactions.
  • They fight dollarization: The U.S. dollar’s position as the world’s reserve currency, and the economic power that provides, is another target of CDBC supporters. Digital currencies could be used to bypass the dollar’s role in international trade, they say.
  • They improve inclusion: Getting the unbanked into the financial system is a major goal in many of the countries looking into CBDCs, particularly in developing nations with large gray economies. That means consumers would be able to transact electronically and likely build up credit.
  • They cut cross-border costs: Another big focus of CBDC supporters is the staggeringly high cost of cross-border transactions, which not only have enormous fees — particularly remittances, which run 5% to 7% — but take days to finalize.

Banks See Doomsday

In their responses, the banking lobbies argued that CBDCs like a digital dollar “could present serious risks to financial stability and may provide few, if any, benefits,” in Bank Policy Institute’s (BPI’s) words.

Arguing that a CBDC would “undermine the commercial banking system in the United States and severely constrict the availability of credit to the economy,” the group added that many of the potential benefits of a CBDC are available from other tools ranging from existing real-time payments networks to well regulated — and bank issued — stablecoins.

The American Banking Association (ABA) said if a CBDC’s “objective is to realize the benefit of technological innovation, we should look to leverage novel developments in private money (like real-time payments systems and well-regulated stablecoins).”

Here are the main reasons banks see CBDCs as a threat:

  • They create unfair competition: A CBDC would fundamentally change “the relationship between citizens and the Federal Reserve,” the ABA argued, noting that a digital dollar would be a direct liability on the central bank. That would, in effect, move money away from depositary banks and into accounts at the Federal Reserve, where the funds can’t be put to work.
  • There would be less to lend: Aside from having to compete with the central bank, commercial institutions would have to hold CBDC deposits in the same way they do securities, BPI said. That means banks “could not do anything with the customer’s CBDC,” deposits, it added. “Any transfer of a dollar deposit from a commercial bank or credit union to a CBDC is a dollar unavailable for lending to businesses or consumers.”
  • There are other options: While CDBC proponents have argued that a digital dollar would make both internal and cross-border payments faster, “this rationale for a CBDC seems increasingly inapt in the United States, where The Clearing House’s RTP real-time payment system, operational since 2017, continues to grow in use,” BPI said. The need for 24/7/365 payments is also a feature of the Federal Reserve’s forthcoming FedNow. On the cross-border side, there are other options, such as The Clearing House, EBA CLEARING and SWIFT’s plan to launch an “immediate cross-border (IXB) payments system” by the end of the year, BPI said.
  • They defend the dollar: On that point, the BPI turned to CBDC skeptical Federal Reserve Chairman Jerome Powell, who said, “the reason the dollar is the reserve currency is ‘because of our rule of law; our democratic institutions, which are the best in the world; our economy; our industrious people; all the things that make the United States the United States.’”
  • The stablecoin threat is overblown: As for the argument that a CBDC is needed to defend against competition from privately-issued stablecoins that could compete with national currencies, BPI called for requiring stablecoins be backed by dollars deposited in commercial banks and treasuries — something the administration recently called for. Unlike CBDCs, BPI said, carefully regulated stablecoins “could avoid undermining the banking system while still offering convenience to customers.”
  • Inclusion is already widespread: One of the biggest arguments made around the world for CBDCs is to improve financial inclusion of the unbanked. As for the U.S., both banking groups said that’s just not as big an issue as it is in developing nations. The ABA and BPI pointed to the Bank On program as an example of a better option with minimal opening requirements and costs — and no penalties.

Going High-Touch and High-Tech Helps Local Banks Win Over Small Business Customers

Across the financial services landscape, digital transformation has changed everything.

This fundamental and technological shift has led to an ongoing recalibration of the relationships small to medium-sized businesses (SMBs) have with financial institutions (FIs).

It’s a recalibration that could favor community banks and credit unions (CUs) over national banking giants.

“SMBs don’t just want a bank — they want a partner,” David Durovy, SVP of transformation at i2c, told PYMNTS. “And community banks and credit unions are uniquely positioned to be that partner.”

The shift toward community banks is driven by practical concerns. Despite the dominance of national banks, high fees and a lack of personalization remain major pain points — potential openings for local banks and credit unions. After all, many SMBs — especially those in rural areas or with lower revenues — struggle to find the level of support they need from national banks

According to Durovy, the appeal of local banks and credit unions is rooted in their ability to provide personalized service and local expertise, elements often lacking in the customer experience at national banks.

“It’s no surprise that if you’re banking with a national brand, you don’t feel that personal connection,” he said. “You don’t get the same banker every time, you don’t get someone who knows your market or your business on a first-name basis. But in a local banking or credit union environment, you can get that.”

Despite their strengths, community banks and CUs face challenges, particularly in digital services. Their digital platforms often lag behind those of national and regional banks. But by leveraging digital innovation without sacrificing the personal touch, community banks and credit unions can position themselves as the go-to financial partners for SMBs and reclaim their relevance.

Read more: Community Banks Appeal to Small Businesses, But …

Why SMBs Are Choosing Community Banks

According to research from PYMNTS Intelligence and i2c, SMBs want fewer fees and better service, and that’s where community banks can shine compared to larger, legacy FIs. Despite their appeal, community banks and CUs face a critical challenge: bridging the gap in digital service offerings between them and larger financial institutions.

“SMBs today are run by entrepreneurs who grew up digitally native. Some of them never used a drive-thru ATM teller. They never had a personal relationship with a banker until they started their business. Bridging that digital divide is crucial,” Durovy said.

Historically, smaller institutions lacked the scale to access cutting-edge technologies. But with modern banking-as-a-service (BaaS) providers and FinTech partnerships, even mid-sized and small banks can now deploy competitive digital services.

“By leveraging next-gen providers, community banks and credit unions can now access the same real-time payments, digital lending, and AI-driven customer support tools that were once reserved for big players,” Durovy said.

“The great thing is that today, digital tools and advanced servicing options aren’t just for national banks anymore,” he added. “Companies like i2c are bringing these capabilities to credit unions and community banks in ways that legacy players haven’t catered to before.”

At the same time, community banks have a unique advantage. Unlike national banks, which offer standardized solutions, local institutions can integrate digital tools with the high-touch service they are known for.

“We often think about our personal lives when it comes to digital banking, but many of those tools haven’t yet been fully exposed to SMBs,” Durovy said. “From on-demand working capital solutions to real-time liquidity management, SMBs need seamless access to financial services — whether they’re in the field, in front of a client, or purchasing supplies for their business.”

He added, “Marrying mobile and digital tools with the personal service provided in-branch is where community banks and credit unions can really differentiate themselves.”

Technology Gap Remains a Challenge and an Opportunity

While digital transformation is critical, reputation remains a defining factor in why SMBs choose financial partners. But what defines reputation in the financial services sector?

“Reputation ultimately boils down to trust,” Durovy said. “And trust is built through consistent service delivery — whether that’s transaction authorization rates, uptime, or simply meeting SMBs where they are in their business journey.”

National banks, by virtue of their scale, may struggle to offer the hands-on support that SMBs need. Meanwhile, community banks, with their focus on local engagement, can reinforce trust through consistent, reliable service.

“It’s not just about having that personal relationship — the handshake, the first-name basis — it’s about the systemic support that backs up those relationships,” Durovy said.

Even in urban centers, community banks maintain an edge when it comes to personalized service.

“There’s this perception that as long as you cater to the major metropolitan areas, you have the market covered. But when you add up all the small communities, it turns out they represent a significant portion of the national economy,” Durovy said. “That’s why local banking matters.”