Update: Credit Unions Challenge the Challenger Banks for Gen Z Wallet Share

The last decade has seen a dizzying acceleration in digital banking innovation. From slick mobile-first challenger banks to the sprawling networks of national giants, competition for consumer attention (and wallet share) has never been fiercer.

Yet, while headlines tend to focus on FinTech unicorns and megabank mergers, a quieter success story has been unfolding among credit unions (CUs).

These financial cooperatives, historically focused on community engagement, have turned that long-standing legacy of involvement and community trust into a powerful modern asset for winning over key growth audiences, particularly across main street businesses and among Gen Z consumers.

The most recent data from the PYMNTS Intelligence report “Credit Union Innovation Readiness Index: The Path to Top-of-Wallet Conversion,” a Velera collaboration, reveals that CUs have achieved a 71% top-of-wallet conversion rate among small-town and rural small and medium-sized businesses (SMBs), and a 60% rate among Gen Z consumers.

Taken together, the top-of-wallet conversion rates among rural SMBs and Gen Zers look to indicate a paradigm shift: These segments are deliberately choosing credit unions. And this choice is coming at the expense of both legacy banking brands and digital-only upstarts, financial players commonly thought of as major contenders for the hearts and wallets of American consumers and small businesses alike.

Understanding Top-of-Wallet Success

To grasp the significance, it helps to clarify the term “top of wallet.” This refers to the financial institution that a consumer or business prioritizes for their primary transactional needs — such as receiving deposits, managing daily cash flow, or making routine payments.

Achieving top-of-wallet status is the holy grail for banks and credit unions alike: It means being the default financial partner, unlocking both direct revenue and critical opportunities for cross-selling.

A 71% conversion rate among rural SMBs means that in nearly 3 out of 4 cases, the local credit union is the go-to financial institution for daily business transactions. Similarly, a 60% rate among Gen Z — digital natives who grew up with PayPal, Venmo, and the promise of online-only banks — signals a dramatic validation of credit unions’ evolving value proposition.

Perhaps the greatest advantage credit unions have is their continued emphasis on local roots and community trust. Their structure as member-owned cooperatives allows them to prioritize the needs of their members over shareholder profits, leading to more personalized service and a perception of greater alignment with customers’ values.

See the data: Credit Union Innovation Readiness Index: The Path to Top-of-Wallet Conversion

For small-town and rural SMBs, banking can be about relationships as much as rates. National banks offer a wide array of services but may often lack the personal touch and local understanding that smaller businesses value. Digital-only banks can provide convenience but may miss the mark on more nuanced, community-based needs.

In contrast, local credit unions know their SMB members as neighbors, not just account numbers, allowing for customized lending and responsive support — especially visible during times of crisis. When the pandemic hit, many credit unions were able to respond quickly with lifeline lending, building loyalty that persists.

Credit unions have shown that with the right mix of trust, technology, and tailored benefits, they can win the loyalty of rural SMBs and Gen Z — groups that will shape the financial landscape for years to come.

While Gen Z is often characterized as digital-first, their banking choices are also guided by authenticity, community involvement, and ethical business practices. Credit unions, with their local roots and member-centric model, naturally align with these values.

Financial literacy is another differentiator. Credit unions invest in educational resources, providing Gen Z with guidance on budgeting, credit building and saving. These initiatives foster trust and long-term relationships. Lower fees and transparent policies further reinforce their appeal to a generation wary of hidden charges and fine print.

Credit unions’ dominance is not uniform. National and digital-only banks remain formidable competitors, particularly among older and wealthier consumers who are often enticed by richer rewards programs or the perceived status of a premium national bank card.

As credit unions modernize, they must not lose sight of the personalized, member-first ethos that differentiates them from larger, impersonal competitors.