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In today’s rapidly evolving financial landscape, emerging technologies like stablecoins are redefining banking, intensifying competition for deposits. While major banks allocate billions to tech annually, community banks and credit unions often operate with significantly smaller budgets. Yet, a growing number of agile smaller financial institutions (FIs) are demonstrating that strategic investment, rather than just sheer spending volume, is the key to digital transformation.
By making savvy platform choices, conducting targeted pilots, and actively co-creating with innovative fintech partners, these institutions are not only closing the tech gap but also significantly improving their efficiency ratios and driving impressive deposit growth.
Key Strategies for Competitive Advantage
- Strategic Investment Over Sheer Spending: Smaller FIs cannot compete on spending volume alone, but disciplined platform decisions, strategic partnerships, and aggressive piloting offer a powerful competitive edge.
- Build vs. Buy Decisions: The ‘build versus buy’ dilemma requires a pragmatic evaluation of internal capabilities and potential return on investment, prioritizing speed to market for common functions and in-house development for true differentiation.
- Optimizing Fintech Partnerships: Maximizing fintech collaborations involves negotiating favorable early-adopter terms, actively participating in product development, and maintaining influence over the technology’s evolution.
- Data Modernization as a Prerequisite: Modernizing data infrastructure, though often seen as unglamorous, is fundamental for unlocking the full potential of advanced technologies like AI and automation.
- Responding to Emerging Tech: The rise of stablecoins and similar technologies underscores the urgent need for robust infrastructure; institutions unprepared risk significant deposit outflows.
Case Study: Michigan State University Federal Credit Union (MSUFCU) – Strategic Partnerships and Homegrown Innovation
Benjamin Maxim, CTO at Michigan State University Federal Credit Union, acknowledges that matching the resources of large institutions like Capital One is impossible for an $8.4 billion credit union with 380,000 members. Instead, MSUFCU prioritizes “strategic partnerships that allow us to do things we’re not able to do on our own.”
This approach aligns with broader industry trends. The Conference of State Bank Supervisors’ 2025 Annual Survey of Community Banks, surveying 268 institutions under $10 billion, found that 75% outsource core platform services and two-thirds outsource customer-facing technologies like mobile banking.
The Build or Buy Conundrum
MSUFCU employs a disciplined framework for its build versus buy decisions, often prioritizing speed. If a partnership can deliver 80% of a solution in two months compared to two years of in-house development, buying is often the preferred route. However, building is reserved for truly differentiating capabilities—tools that are unique or can be developed more effectively internally.
This logic led MSUFCU to build its own digital banking platform over 15 years ago. Vendor options at the time lacked flexibility, and their per-user fee models would have become unsustainable with membership growth. Maxim emphasizes the desire for “full control,” enabling customization and the ability to seamlessly integrate new solutions.
From Innovation to Investment
Over time, MSUFCU sold the intellectual property of its homegrown platform to CU NextGen, a credit union technology provider. This strategic move not only modernized the platform into a product called Nextly but also provides MSUFCU with a revenue share on every contract and an equity stake in CU NextGen. Furthermore, MSUFCU retains the ability to customize Nextly beyond what other clients receive.
Nextly exemplifies a new generation of API-driven platforms that allow smaller institutions to integrate fintech offerings without extensive core overhauls. As Ryan Siebecker of Narmi noted, API-based systems offer “speed and ease,” simplifying the integration of new user experiences.
MSUFCU extended its partnership model by directly investing in fintechs through Reseda Group, a subsidiary formed in 2021. This model yields more than financial returns; early investment grants MSUFCU a seat at the table, influencing product development and ensuring best-in-class solutions tailored to its member base.
Case Study: Bankwell – Data Centralization and Efficiency Through Agile Pilots
When Ryan Hildebrand joined Bankwell, a $3.4 billion Connecticut community bank, as Chief Innovation Officer, he found fragmented systems, manual processes, and a lack of a central CRM. His modernization plan began with recruiting talent from larger institutions and, crucially, centralizing data.
Bankwell implemented Snowflake as its data warehouse, consolidating information from its core system, online banking platform, and CRM. Hildebrand highlights the common issue of vendors owning or being poor at managing data, making a central repository “really key.”
Unlocking Efficiency with AI and Automation
The bank then deployed Microsoft Copilot and Glia. Copilot agents now automate high-volume, low-complexity tasks across operations, risk, and finance, significantly reducing the need for additional headcount as the bank expands. The results are striking: document creation time decreased by 40%, customer response times were halved, and the bank estimates annual savings of around $2.8 million. “We’re seeing at least 10 hours a week per employee [saved] across the employee base,” Hildebrand reports.
Agile Vendor Management for Cost Savings
Bankwell also rigorously scrutinized its vendor list. Hildebrand opts for short, relatively inexpensive pilots—typically between $20,000 and $100,000—to test vendor efficacy before committing further. This agile approach, combined with vendor consolidation, is projected to save $14 million over five years.
These strategic moves have visibly impacted Bankwell’s efficiency ratio, which measures how much a bank spends to generate revenue. Two years ago, it was around 55%; it has since dropped below 50%. “We’re making more money, spending less,” Hildebrand states.
Key Takeaways: Navigating the Competitive Landscape
Analysts agree that FIs excelling in this environment share a common trait: they make deliberate choices about where to focus, rather than attempting to match larger rivals feature for feature. Carey Ransom, managing director at BankTech Ventures, notes that banks with clear strategies “can definitely outperform larger competitors.” The most successful ones, he adds, identify niche opportunities to serve specific customer segments deeply and negotiate favorable terms as early partners to emerging fintechs.
For smaller institutions aspiring to remain independent, the window to catch up with tech-forward peers is closing. Dan Latimore, founder of Lone Pine Advisors, warns that “if they want to survive as a standalone entity, the time to move is now.”
Brian Kaas, president and managing director of TruStage Ventures, emphasizes that fintech partnerships are no longer optional. They are becoming essential for smaller institutions to mitigate threats they cannot afford to build against alone. He cites stablecoins as a technology that could fundamentally alter how credit union members move and store money. TruStage is launching a stablecoin pilot for credit unions, and Kaas cautions that institutions lacking the necessary infrastructure risk permanent deposit loss. “Once those deposits leave the system, my concern is they never come back,” he says.
Ultimately, for institutions willing to embrace modernization, technology is often the easier aspect. As Hildebrand concludes, “The technology is mostly there to get stuff done. The biggest challenge is being organizationally ready.”
Source: TheFinancialBrand.com