Local Roots: How Community FIs Can Win the Digital-First Generation

As digital banking continues to make inroads, community banks and credit unions (CUs) stand to capture an unexpected demographic: young, digital-first consumers. In a challenge to the conventional wisdom, Generation Z and millennial customers are increasingly drawn to these smaller financial institutions (FIs). The reason? Their potential to offer personalized service — a key differentiator that large banks often struggle to replicate. This trend hints at a future banking landscape in which competitive advantage stems less from FIs’ global reach and more from the strength of their local roots and ability to nurture individual dreams. For community banks and CUs, this moment brims with potential, calling for next-level innovation that honors their mission of personal connection.

Younger Consumers Jolt the Banking Status Quo

From Big Data to Big Impact, Banking Needs to Get Personal

Balancing Protection and Personalization in Banking

Next Steps: Leveraging Data for Local Banking Success

Younger Consumers Jolt the Banking Status Quo

Young retail banking customers are keeping an eye on the exits at their current FIs. These digital natives want more than just slick apps at a time when banks risk forgetting that quality service still reigns supreme.

Young consumers want digital-first banking with a smile — and a goalpost.

While most Gen Z and millennial consumers currently use large institutions as their primary banks, an undercurrent of revolt is brewing. Fifty-two percent of these lucrative customers are considering community banks as an alternative, with CUs close behind, at 47%. The familiar narrative is that expectations for modern digital banking experiences are driving a youthful openness to switching FIs. Indeed, 31% of Gen Z customers are threatening to walk away if their current banks fail to offer cutting-edge banking tools.

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of millennial and Generation Z consumers are open to switching their current primary banks for community banks or CUs.

Digital capabilities alone, however, are proving insufficient to retain digital natives as the latter increasingly demand personalized, goal-oriented support. A new study finds that nearly half of Gen Z consumers are willing to switch to a banking competitor for tailored financial guidance and spend management tools. This puts a new twist on the demand for technology, with personalization becoming the goalpost of sophisticated, feature-rich banking.

Service quality no longer matters — or does it?

Although digital transformation is dominating the banking industry’s focus, memorable customer service remains a critical factor in retaining account holders. A striking 21% of retail banking consumers who have closed accounts cite poor customer service as the primary reason. This contrasts with less than 5% who did so because of dissatisfaction with the mobile experience.

The importance of service quality is top of mind for many consumers who are considering a switch: 26% who are likely to change FIs blame unsatisfactory service. This finding serves as a stark reminder that while digital innovation is crucial, even the most elaborate digital interface cannot compensate for subpar service. As banks and FIs prioritize digital transformation, they must ensure that their focus on technology does not come at the expense of quality service.

From Big Data to Big Impact, Banking Needs to Get Personal

Retail banking customers are done with one-size-fits-all. These days, they demand financial advice nearly as unique as their fingerprints. Can FIs deliver a win-win? The prize is no less than customer loyalty.

Banking customers yearn for wisdom and convenience, packaged just for them.

97%

of financial services providers across all major global regions migrated at least one application to a different IT infrastructure in the last year.

Personalized financial advice is proving to be a powerful tool for customer engagement. Fifty-four percent of retail banking customers expect their banks or FIs to understand them and leverage their existing data to personalize their banking experiences. This sentiment is not simply wishful thinking: When banks rise to the challenge, consumers respond. In 2024, 42% of banking customers recall receiving personalized financial advice from their banks, and a remarkable 76% acted on these recommendations. Simply put, customers are not merely receptive to personalized guidance: They are eager for it.

FIs are sporting the latest technology to unlock the potential of personalization.

FIs globally are adapting their technology infrastructure to meet the demand for personalized, digital-first banking ecosystems. An overwhelming 97% of financial services providers across every major global region have migrated at least one application to a different technology stack in the past year. Driving this trend is the need to improve data access speeds (42%), strengthen security (41%) and integrate cloud-native services such as artificial intelligence (AI) and machine learning (ML) (39%) — all critical ingredients of digital banking personalization. For community banks and CUs, which often excel in customer service, this presents both a challenge and an opportunity. By adopting modern, agile technology architectures, these smaller institutions can combine their service strengths with advanced personalization capabilities. This combination could allow them to leapfrog larger competitors in delivering integrated, personalized banking experiences.

Balancing Protection and Personalization in Banking

Data is banking’s new gold mine, but just one data breach could be catastrophic. Savvy FIs are not hiding behind walls. They are making security a competitive edge to win hearts and accounts.

Personalization is in demand, but it comes at a price.

While 48% of retail banking consumers are willing to share additional personal data for tailored experiences, the vast pools of data that allow for personalization also amplify the risks associated with data breaches. Recent years have seen 69% of banks in the United States affected by data breaches, with 55% of affected FIs reporting costs between $5 million and $10 million per breach. Consumers feel the pain too: 45% of U.S. banking customers report experiencing security or privacy issues with their FIs, underscoring the critical need for banks and CUs to make robust data protection central to their value propositions.

48%

of retail banking customers are willing to share additional personal data in exchange for more personalized banking experiences.

A single security misstep can bankrupt customer trust.

Security is a top priority for 91% of retail banking consumers when choosing an FI. From Gen Z to baby boomers, the message is clear: Protect my data. Indeed, inadequate security measures could cost banks more than financial losses, with 75% of banking customers ready to switch to a competitor if their sensitive personal data is compromised. The takeaway? Personalize, but make ironclad security a cornerstone of that personalized experience.

Banks can turn security fears into customer empowerment.

More than 9 in 10 U.S. retail banking customers rank the protection of sensitive personal data as a bank’s most critical capability. However, with nearly half having experienced a banking security concern firsthand, there has been an erosion of trust: 67% of consumers now doubt their bank’s ability to counter sophisticated threats such as deepfake fraud. This gap between expectation and reality presents yet another opportunity for community banks and CUs. By incorporating personalized services with robust, transparent security measures, these smaller FIs can rewrite the security narrative, turning it from a worry into a value-added service.

Next Steps: Leveraging Data for Local Banking Success

Gen Z and millennial consumers’ preference for digital-first banking plus tailored financial guidance is a trend that continues to gain momentum. The race to capture these valuable customers will determine the leaders of tomorrow’s financial industry. By leveraging data-driven insights to deepen community connections, smaller FIs can differentiate themselves in an increasingly homogeneous market. Community banks and credit unions are in a position of strength — if they seize the moment.

PYMNTS Intelligence offers the following actionable roadmap for community FIs looking to gain — and keep — primary banking status with their customers:

Implement a data-driven personalization ecosystem. Deploy advanced analytics to aggregate and parse customer data, leveraging AI-powered insights to offer tailored experiences across all touch points. Implement modular financial planning tools that allow consumers to customize strategies aligned with their life stages and financial objectives, and utilize predictive modeling to generate hyper-targeted product offerings and proactive financial guidance.

Architect an omnichannel customer service model. Integrate AI-driven automation with high-touch human expertise. Pilot conversational generative AI chatbots for routine inquiries and preliminary financial guidance, but ensure that frictionless escalation to human advisers is easily accessible. Equip staff with real-time, data-enriched customer profiles to facilitate personalized consultations and product recommendations tailored to individual financial journeys.

Enhance cybersecurity posture with multifactor authentication (MFA) and contextual risk analysis. Implement ML-driven predictive analytics to identify potential fraud and dynamically adjust authentication protocols. Integrate behavioral biometrics, such as keystroke dynamics or mouse-movement analysis, for continuous authentication, and provide a user-friendly security dashboard to empower customers with insights into their account activity and security measures.

Partner with FinTechs. Prioritize partnerships that enhance personalization and improve back-end efficiency. Collaborating can dramatically accelerate implementation timelines and provide access to ongoing specialized support, enabling smaller institutions to rapidly deploy advanced technologies while maintaining their community-focused approach.

An institution’s community roots are its superpower. FIs that build this connection into every data-driven interaction will offer a banking experience that is not simply convenient but also memorable — a winning differentiator in today’s financial landscape.