Minding the Gap: What Separates the Best From the Rest in the Credit Union Space

Credit unions (CUs) face mounting pressure to innovate as competition for consumer loyalty intensifies. With member expectations shifting toward seamless, digital-first financial experiences, the need for modernization has never been greater. Top-performing CUs invest in mobile banking and strategic FinTech partnerships to enhance engagement and drive growth. Meanwhile, CUs that are slower to adapt may risk member attrition and declining relevance. Only a few factors separate the best innovators from the rest, however. The data suggests several strategies credit unions can adopt to narrow the innovation gap and remain competitive.

• The Innovation Divide Deepens
• Member Alignment Drives Effective Innovation
• Smaller CUs Prove Innovation Is a Mindset
• Closing the Gap: Top Innovator Strategies for CU Excellence

The Innovation Divide Deepens

Top-performing innovators in the credit union space are distinguishing themselves more and more from those falling behind. Digital-first strategies and FinTech collaborations set exemplary innovators apart from the rest.

Top-performing credit unions widen the innovation gap.

The gap in innovation readiness among credit unions continues to widen, with top performers scoring 2.7 times higher than the lowest-tier CUs. Top CUs score 77 out of 100 — representing the percentage match between their offerings and their members’ wishes — compared to just 29 for bottom performers. This gap has grown from 68 for top innovators versus 43 for the lowest tier in 2023, reflecting accelerating innovation disparities. Among the most competitive CU offerings, real-time payments stand out, with 89% of top performers offering them, compared to an average of only 51% for all CUs. This difference reinforces top performers’ competitive edge.

77%

Match between what top-performing CUs offer and what their members want

Top performers invest more in innovation — and reap more ROI.

It may seem obvious, but greater investment in innovation leads to more innovation. PYMNTS Intelligence research shows that top CU innovators invest approximately 5.6% of their assets into innovation, versus only 3.1% for their least innovative counterparts. The return on investment (ROI) is that top performers offer 10 more products and services than bottom performers. Top innovators also experience almost half as much churn — or loss of members — as the lowest tier, at 1.7% versus 3.3%, respectively.

FinTech partnerships power new product development.

Another key factor that differentiates top performers from the rest is their ability to develop products through partnerships. Top-performing CUs have approximately twice as many products developed with third parties as bottom-tier CUs, at 6.1 versus 3.3. By collaborating with FinTechs, CUs can accelerate innovation, strengthening their digital offerings, including loyalty and rewards programs, money movement facilitation and mobile wallet features. As CUs modernize, leveraging third-party partnerships ensures access to emerging technologies that can keep them competitive with their peers.

Member Alignment Drives Effective Innovation

Misalignment between member interests and CU innovation threatens retention, particularly among younger members and small businesses. Structuring innovation processes around member priorities helps ensure that CUs maintain a competitive edge.

Lower-tier CUs risk member dissatisfaction.

45%

of Americans are open to switching credit unions, increasing pressure on less innovative CUs.

Credit unions failing to modernize can risk losing members to institutions with superior digital banking or faster transactions. According to a recent survey, 45% of Americans say they would be open to switching from their current to a new CU. Generation Z and millennials are even more open to switching than older Americans, with about half reporting this willingness. Meanwhile, another survey finds 13% of retail bank customers saying they “probably” or “definitely” will switch institutions in the next 12 months. Without urgent digital improvements, bottom performers could face declining member engagement and rising churn rates.

Better innovation rests on better alignment with member demands.

PYMNTS Intelligence research suggests several areas where CU alignment with member priorities is crucial. Both consumers and small to mid-sized businesses (SMBs) rank security enhancements and self-service banking as their top two must-have features. Credit unions largely recognize this, with 64% planning biometric authentication improvements and 55% prioritizing self-service solutions such as mobile banking and digital onboarding. These figures could still be improved, however. Moreover, loyalty program investment remains extremely low despite high demand. Loyalty programs rank third in priority for both consumers and SMBs, yet they are dead last on CU innovation roadmaps. Just 17% of CUs plan to enhance their reward structures, leaving a significant gap between consumer demand and actual offerings. This gap could jeopardize a CU’s membership base.

Smaller CUs Prove Innovation Is a Mindset

Innovation is an attitude, and size isn’t everything. Smaller, agile CUs outperform larger institutions in credit card management apps, loyalty programs and QR code capabilities.

Smaller credit unions lead in key digital innovations.

Smaller credit unions prove that size does not determine innovation success. Despite fewer resources, smaller credit unions are outpacing larger institutions in deploying agile, high-demand features such as mobile credit card management and QR code payments. Forty-one percent of the smaller top performers offer mobile credit card apps, compared to 18% of the largest CUs in the lowest tier of innovation readiness. Small CUs also lead in loyalty and rewards programs — key features for SMBs and Gen Z that many large institutions underprioritize. In addition, the average small CU score is 53, whereas the average large-asset CU has a score of 54. This differential in innovation readiness is negligible, showcasing that asset size alone does not account for innovation readiness and demonstrating that factors other than financial capacity are critical for innovation leadership.

11%

of the smallest CUs now take a “lagger’s” strategy on innovation, down dramatically from 47% in 2022.

Small CUs are driving a shift to a more proactive strategy.

At the heart of effective innovation is a proactive mindset, and smaller CUs are proving this. The share of CUs adopting a “quick follower” innovation strategy has doubled since 2022 — with the smallest CUs propelling this shift. During this time frame, the share of all CUs classified as innovation “laggers” — that is, those that wait until new products are well-developed and understood before integrating the most accepted ones — has dropped from 37% to 11%. Moreover, the smallest CUs — those with 10 branches or fewer — are driving the shift, with 47% of them having had a lagger’s approach in 2022, but only 11% in Q4-2024.

More proactive innovation strategies promote deeper online banking engagement for all CUs, in fact. For example, 57% of CU members are “active users” of mobile banking. The share increases to 65% for members of CUs that are “early launchers” — those CUs having the most proactive strategies of all — compared to 54% for laggers.

Community engagement helps small CUs stay aligned with members.

Smaller credit unions differentiate themselves through personalized service, niche financial products and deep community ties — another way of staying well aligned with member priorities. Smaller CUs also lead in specialty lending and mission-driven financial services. For example, Santa Cruz Community CU’s ITIN lending program — which provides loans to individuals who lack Social Security numbers — and Element FCU’s cannabis banking innovations address niche client needs. These targeted, high-impact solutions allow small institutions to serve markets that larger banks often overlook. By leveraging community trust and financial inclusion strategies, small CUs continue to punch above their weight in innovation.

Closing the Gap: Top Innovator Strategies for CU Excellence

To stay competitive, credit unions must align their innovation priorities with evolving consumer expectations. PYMNTS Intelligence recommends the following action points for CUs:

Invest strategically in digital transformation.
Top-performing CUs invest a greater share of assets in innovation. Investment-driven initiatives like expanding mobile-first banking and real-time payments are critical for retention.

Expand FinTech partnerships for accelerated innovation.
Historically, CUs that leverage third-party collaborations develop more products than those that don’t. Strengthening FinTech alliances ensures access to cutting-edge digital payment tools.

Prioritize loyalty and rewards programs.
Rewards are a high priority for CU members, yet less than one-fifth of CUs prioritize them. Developing personalized incentives aligned with member behaviors can fuel engagement and retention.

Adopt a proactive innovation strategy for deeper engagement.
CUs with proactive innovation strategies see a substantial increase in engagement. A proactive mindset is free — and CUs that begin by adopting one can make the most of their investments to drive ROI and member loyalty.

Innovation doesn’t always have to require a large effort. By journey mapping the member experience, identifying gaps and piloting new ideas, credit unions can quickly learn what works — and what doesn’t. The key is to keep iterating. Those that embrace this mindset, regardless of size, demonstrate the agility and willingness to test, learn and evolve.”

Scott P. Young
SVP, Emerging Services

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