Small but Mighty: How Smaller Credit Unions Are Leading Financial Innovation

Credit unions (CUs) have a strong reputation for setting the gold standard in community-oriented, human interactions in banking. Because of this member-centric focus, they are less likely to be regarded as being on the vanguard of digital-first innovation. This stereotype is quickly becoming outdated, however, as CUs adopt new financial technology at a rapid pace. Smaller CUs are even gaining ground faster than their larger counterparts. PYMNTS Intelligence’s Innovation Readiness Index reveals a higher share of top performers in innovation among CUs with assets of less than $1 billion than among those with assets of more than $5 billion.

Still, even with rapid technological advances, smaller CUs face many hurdles on the path toward innovation. Funding and staff limitations are key barriers. Other challenges may include a lack of strategic alignment among internal stakeholders or inadequate market knowledge, as noted by Velera. CU partnerships with third parties are becoming critical to closing these gaps and accelerating innovation further.

Small CUs Outperform in Financial Innovation

Smaller CUs Face Obstacles in the Path to Financial Innovation

Partnerships Offer Key to Overcoming Innovation Challenges

How CUs Can Secure an Innovation Advantage

Small CUs Outperform in Financial Innovation

Contrary to popular belief, a financial institution’s size is not a strong indicator of its capacity for financial innovation. Many smaller CUs are innovating at a faster pace than larger ones.

Credit unions with less than $1 billion in assets are out-innovating their larger counterparts — but in different areas.

According to the PYMNTS Intelligence Innovation Readiness Index, 17% of CUs with less than $1 billion in assets are top performers in innovation, compared to just 13% of CUs with more than $5 billion in assets. However, the exact areas of innovation vary between smaller and larger top performers. Among top-performing CUs with less than $1 billion in assets, 69% are aiming to increase membership with less restrictive credit offerings, compared to only 20% of top performers with more than $5 billion in assets. Meanwhile, 62% of the smallest top performers are seeking to innovate by offering a simple and intuitive user experience, compared to 100% of the largest top performers. Similarly, only 54% of this smallest top-performing group are investing in payments innovation and providing a highly personalized user experience, versus 100% of the largest top performers.

17%

of CUs with less than $1 billion in assets are top innovation performers, versus 13% of CUs with more than $5 billion in assets.

These discrepancies between the smallest and largest CUs’ innovation performance and strategies, particularly around making credit less restrictive, have significant implications. The smallest CUs may not be as far along in their innovation roadmaps as the largest CUs, with a lower share choosing to focus on more advanced payment innovations. However, the higher share of top performers in the smallest-CU group indicates their innovations are more highly aligned with their members’ satisfaction.

This, in turn, suggests that the smallest CUs may be catering to a different membership base than the largest CUs: in particular, consumers who may be challenged in obtaining access to credit. This finding underscores the importance of innovation for the smallest of CUs, both for their own members and in a larger, societal context. They may have less capacity and resources for innovation than their peers, but their innovations could be some of the most essential and highly appreciated, helping financially underserved populations or members who are in the greatest need of banking innovation.

Credit unions are allocating a larger share of their budgets to tech investments than banks are.

A recent study found that 37% of CUs plan to increase their technology investments by up to 10%, while a similar proportion of banks are increasing their technology spend by only as much as 5%. When it comes to CUs’ top technology priorities, 32% are focusing on artificial intelligence (AI), while 13% are investing in loyalty programs.

These digital investments aim to bridge the customer experience gap between big banks and smaller CUs, according to industry researchers. These smaller financial institutions (FIs) have a key advantage in this competition because they typically leverage vendor-provided core systems rather than proprietary software. This approach allows for easy maintenance and integration with new modules, as well as better support from third-party technology firms.

Smaller CUs Face Obstacles in the Path to Financial Innovation

Smaller CUs’ financial innovation journeys have not been entirely smooth. Funding and resource shortages are common obstacles that slow their digital progress.

Budget considerations are the top obstacle to financial innovation.

28%

of CUs with less than $1 billion in assets say budgetary constraints are their biggest obstacle to innovation.

PYMNTS Intelligence research found that 28% of CUs with less than $1 billion in assets say budgetary constraints are their biggest obstacle to innovation. This compares to 7.7% of CUs with more than $5 billion in assets. As CUs grow, different obstacles emerge. Sixteen percent of smaller CUs report that technological challenges are their biggest obstacle to innovation, compared to 26% of larger CUs. It is notable that smaller CUs often outpace their larger counterparts in technological proficiency. However, CUs tend to have different innovation roadmaps based on their asset amounts and are thus working on technologies that have differing levels of difficulty.

Shortage of expertise hinders smaller credit unions in financial innovation.

A Wolters Kluwer survey found a significant disparity between where CUs would like to be in terms of financial technology compared to where they actually are. While 82% of respondents said having a fully compliant digital strategy was important, only 9% reported offering a full suite of digital lending experiences. When asked why this gap exists, respondents cited several barriers. Thirty-one percent said they had trouble finding the right partner, while 28% indicated an absence of technology resources. The largest obstacle by far was a lack of confidence in their ability to create a digital strategy, with 72% expressing this concern.

Partnerships Offer Key to Overcoming Innovation Challenges

Due to resource constraints, smaller CUs view partnerships as essential to boosting innovation. This makes choosing the right partner a critical step in their digital transformation.

Smaller credit unions are embracing third-party partnerships to bridge the resource and financial gap.

PYMNTS Intelligence research found that virtually all CUs with less than $1 billion in assets (99%) and top performers (97%) agree that collaborations with outside vendors, industry consultants and CU service organizations are an important part of their payment innovation process. In addition, more than 28% of top-performing CUs say establishing partnerships and collaborations is the number-one action they could take to improve their innovation capacity, which is 8.5 times more than the share of bottom performers that say the same. These collaborations have enabled CUs of all sizes to develop an average of 3.7 products and features.

99%

of smaller CUs say partnerships are an important part of the payment innovation process.

Furthermore, third-party partnerships have delivered concrete results. PYMNTS Intelligence research shows that the most innovative CUs have developed 2.5 times more products and features with partners than their less innovation-ready peers. Specifically, top-performing CUs have created 5.5 products and features in collaboration with third parties, compared to just 2.2 among bottom performers.

Member experience is emerging as a key focus of third-party partnerships.

CU members increasingly expect the same personalized experiences they receive in other aspects of their digital lives. However, smaller CUs often struggle to meet these expectations. Third parties can play a critical role in achieving this goal. For example, a third-party vendor helped a CU partner identify members using payday lenders so that the credit union could target them with more favorable, less predatory lending options. Other CUs are deploying third-party technology to analyze members’ spending and depositing habits to determine whether they work in gig economy jobs or are starting small businesses, tailoring their offers accordingly. These personalized offers and services help level the playing field between smaller CUs and larger traditional banks, which have been deploying similar services for years.

How CUs Can Secure an Innovation Advantage

Smaller credit unions can leverage third-party partnerships to narrow the competitive divide with larger institutions despite their limited resources. By strategically collaborating with FinTechs and other service providers, these CUs gain access to cutting-edge technologies and expertise that would otherwise be out of reach due to budget constraints. This approach allows smaller CUs to offer competitive digital services, enhance member experiences and streamline operations without requiring significant in-house development or infrastructure investments.

Moreover, third-party partnerships help smaller CUs achieve economies of scale and accelerate time to market for new products and services. By joining forces with specialized vendors, they can tap into advanced capabilities in areas such as loan origination, payment processing and digital banking. This collaborative model enables smaller CUs to compete more effectively with larger FIs. It also offers opportunities to differentiate themselves by providing innovative, tailored solutions to their members. However, it is crucial for smaller CUs to carefully evaluate partners, conduct thorough due diligence and implement robust risk management practices to maximize the benefits of these relationships while mitigating associated risks.

For over 70 years, South Bay Credit Union has grown alongside our community, evolving to meet its changing needs. Innovation is key to our ability to do that, but we’re a smaller credit union, so we prioritize solutions and partnerships that overdeliver on investment — helping us offer products and services that make us truly competitive with the big banks.”

Paris Chevalier
President and CEO