How Innovative Small Banks and Credit Unions Are Stretching Their Tech Dollars
By Suman Bhattacharyya, Contributor at The Financial Brand
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Stablecoins and other emerging technologies are raising the stakes. Smaller FIs that lack the infrastructure to respond risk losing deposits.
Big banks pour tens of billions a year into technology. Most community banks and credit unions spend a fraction of that, but some are showing that how you invest matters more than how much.
Smaller financial institutions usually approach digital transformation by partnering with core providers and established vendors. But a handful are closing the gap through platform choices, pilots and co-creating with fintechs. The results are showing up in efficiency ratios and deposit growth.
Need to Know:
- While smaller banks and credit unions can’t outspend their larger peers, they can compete by making disciplined platform choices, partnering strategically and piloting aggressively.
- The build or buy decision hinges on a realistic assessment of in-house talent and ROI.
- Fintech partnerships work best when you can negotiate early-adopter terms, co-create with vendors, and retain influence over how the technology develops.
- Data modernization is the unglamorous prerequisite that makes AI and automation payoffs possible.
- Stablecoins and other emerging technologies are raising the stakes. Smaller FIs that lack the infrastructure to respond risk losing deposits.
Case Study: Michigan State University Federal Credit Union
Benjamin Maxim, chief technology officer at Michigan State University Federal Credit Union, says the credit union can’t match the resources of Capital One, which once bought an entire UX firm to build out its design capabilities.
“We have to find strategic partnerships that allow us to do things we’re not able to do on our own,” he says.
According to the Conference of State Bank Supervisors’ 2025 Annual Survey of Community Banks, a survey of 268 institutions under $10 billion in assets, 75% outsource core platform services and two thirds outsource customer‑facing technology such as mobile banking and automated account opening.
Question 1: Build or Buy?
With $8.4 billion in assets and 380,000 members, MSUFCU starts with a disciplined approach to the build versus buy question. The decision often comes down to speed.
“Sometimes being first to market is such an advantage,” he says. If a partner gets you 80% of the way there in two months versus two years building it yourself, the math favors buying.
Key insight: That doesn’t necessarily mean buy is the default. Building is typically for capabilities that are truly differentiating, he says — tools that don’t exist in the market, or that the credit union could develop more easily on its own.
That logic drove the credit union to build its own digital banking platform some 15 years ago. Vendor options at the time fell short on flexibility, and the per-user fee model would have become unsustainable as membership grew.
Key factor: “We wanted full control,” Maxim says, including the ability to extend and customize, piecing together solutions in a unified experience and adding “Lego pieces” over time rather than stitching together a patchwork of vendor windows. The cost of building and maintaining the platform in-house never exceeded what they would have paid a vendor.
Over time, MSUFCU sold the intellectual property behind its homegrown platform to CU NextGen, a credit union technology provider, which modernized it into a product called Nextly. As other credit unions adopt Nextly, MSUFCU gets a revenue share on every contract and holds an equity stake in CU NextGen. It also can customize the platform beyond what other Nextly clients receive.
Nextly is part of a new generation of platforms built with API layers that let smaller institutions plug in fintech offerings without overhauling their cores.
The difference between legacy integrations and open, API-based systems “is really speed and ease,” Ryan Siebecker, manager of forward deployed and implementations engineering at Narmi, said in a previous interview with The Financial Brand. “You create API credentials and you flip a few settings … and you have a new user experience.”
MSUFCU took the partnership model a step further, eventually investing in fintechs directly through Reseda Group, a subsidiary it created in 2021. The model offers more than financial returns: by investing early, MSUFCU gets a seat at the table as products are built, shaping tools that could be deployed to its member base.
“We’re getting best-in-class solutions, because fintechs are very focused on solving one problem and solving that very well,” he says.
Case Study: Bankwell
When Ryan Hildebrand joined Bankwell as chief innovation officer about two and a half years ago, the $3.4 billion Connecticut community bank looked like many of its peers: siloed systems, manual processes and no CRM.
“Things [were] functional, but really fragmented,” he says.
As part of his plan to modernize the bank’s tech stack, he recruited talent from larger institutions. The first priority was to centralize data. Bankwell stood up Snowflake as a data warehouse, pulling in information from its core system, online banking platform and CRM into one place.
“The issue that many times exists is either the existing vendors aren’t great at data, or they own the data,” he says. “Getting it out of all these core systems into a central place is really key.”
The bank rolled out Microsoft Copilot and Glia, deploying Copilot agents to automate high-volume, low-complexity tasks in operations, risk and finance, work that would otherwise require additional headcount as the bank grows. Document creation time dropped by 40%, customer response times were cut in half, and the bank estimates it is saving around $2.8 million annually.
“We’re seeing at least 10 hours a week per employee [saved] across the employee base,” he says.
Doing More With Less
Bankwell also scrutinized its vendor list. Rather than committing to platforms upfront, Hildebrand runs short, relatively inexpensive pilots — sometimes spending between $20,000 and $100,000 — to test whether a vendor actually delivers before committing further. The bank is also consolidating vendors, a move Hildebrand projects will save $14 million over five years.
The results are showing up in the efficiency ratio, which measures how much a bank spends to generate a dollar of revenue. Two years ago, the ratio hovered around 55%. It has since dropped below 50%.
“We’re making more money, spending less,” he says.
Key Takeaways: What it Takes to Compete
Analysts say FIs that are pulling ahead share a common trait: they make deliberate choices about where to focus, rather than trying to match larger rivals feature for feature.
“The banks that can be clear about their strategy and where and how they want to win can definitely outperform larger competitors,” says Carey Ransom, managing director at BankTech Ventures. The scrappiest ones, he adds, are finding niche opportunities to serve customer segments deeper than anyone else and negotiating favorable terms by being early partners to emerging fintechs.
For smaller institutions that want to stay independent, the window to catch up with tech-forward peers is closing, says Dan Latimore, founder of Lone Pine Advisors.
“If their plan is to be acquired in the next few years, it makes sense to continue with business as usual,” he says. “But if they want to survive as a standalone entity, the time to move is now.”
Brian Kaas, president and managing director of TruStage Ventures, says fintech partnerships are no longer optional — they may be the only way smaller institutions can stay ahead of threats they can’t afford to build against alone.
Stablecoins, he adds, are an example of technology that could change how credit union members move and store money. TruStage recently announced plans to launch a stablecoin pilot for credit unions, and Kaas warns that those without the infrastructure to respond risk losing deposits permanently.
“Once those deposits leave the system, my concern is they never come back,” he says.
For institutions willing to modernize, Hildebrand says technology is often the easier part.
“The technology is mostly there to get stuff done,” he says. “The biggest challenge is being organizationally ready.”
