As fintechs chase banking charters, community financial institutions face a quiet war on trust

Over the past six months, a flurry of fintechs have applied for banking charters.

Since the global financial crisis, new bank formations dropped from 132 on average per year to just six. For more than a decade, that scarcity helped insulate community banks from new competition. Today, that protection is eroding as fintechs enter the system as fully regulated competitors.

Credit unions operate under a different charter model, but they are not insulated from the impact. As fintechs expand into full-service banking, they are reshaping expectations around speed, flexibility and digital experience — raising the bar for all institutions competing for members and customers.

With PayPal and other tech leaders racing deeper into regulated banking, these major fintechs aren’t just processing payments; they’re gunning for deposits, lending power, and national reach.

Community banks and credit unions once relied on charters — and trust — to hold their ground against fintechs. That strategy is no longer working.  As fintechs encroach, community financial institutions face mounting pressure. Are their systems prepared to keep up with competitors that can build, launch, and pivot products in weeks?

Banks and credit unions are now facing a reality where fintechs are leading the race towards banking charters and regulated capabilities, and licenses are no longer barriers to entry. Companies once dismissed as “payments apps” or “technology partners” are now aggressively pursuing deposits, lending authority, and national reach.

From partners to competitors

For years, fintechs positioned themselves as complements to traditional financial institutions. They promised to partner to deliver better user experiences, faster onboarding, and smarter tools as add-ons to traditional infrastructure. However, with deeper regulatory ambitions, they are moving decisively into the heart of financial services. Deposits, lending, and balance-sheet products are no longer off limits.

Their advantage isn’t just brand recognition or digital fluency. Fintechs can design, launch, test, and iterate new products in weeks (sometimes days) because their systems are designed for constant change. Many community banks and credit unions, by contrast, often face product timelines measured in months or years. Their inability to innovate quickly and match the digital experience is pushing members towards institutions that can.

The structural problem banks and credit unions can’t ignore

Leaders across the industry recognise that delivering a modern, fully digital experience is critical to long-term relevance. Yet recognition hasn’t translated into readiness.

The reason is simple but uncomfortable: many banks and credit unions are still running on core systems that were built decades ago. Over time, layers of customisation, workarounds, and point solutions have accumulated, creating technical debt that slows innovation and increases risk.

Modernisation efforts frequently focus on what members see first, such as a new mobile app with a shiny new interface, refreshed digital channels, or incremental UX improvements. These investments can improve perception in the short term, but they rarely address the underlying constraints.

When modernisation is surface-level only, institutions remain structurally limited. Launching a new product still requires navigating brittle integrations and lack of business logic — a fundamental issue that fintechs just do not face.

The real shift is from uniform, tightly coupled core systems to composable, API-first platforms designed for change.

A next-gen core enables banks and credit unions to:

• Launch and iterate products faster
• Integrate seamlessly with fintech partners
• Access real-time data for personalisation and insight
• Adapt to regulatory and market changes without massive rework

Institutions that invest in structural agility will be able to respond to fintech competition with confidence. Those that don’t may find themselves defending trust they can no longer consistently deliver on.

Why this isn’t just a tech issue

Customers and members don’t evaluate trust based only on mission statements. Instead, it’s built through moments that matter, such as opening an account, applying for a loan, resolving an issue, or accessing funds quickly when life changes.

Increasingly, people compare those experiences, not just to other banks or credit unions, but to digital-first banks and fintechs. Slow onboarding, confusing workflows, or limited product flexibility erode confidence.

Younger generations in particular are unforgiving of friction. If switching providers is easy and digital experiences elsewhere are meaningfully better, loyalty becomes conditional. In this environment, trust isn’t just about values, it’s about trusting capabilities to be there and work effectively.

Progress without disruption

The idea of replacing a core system can feel overwhelming, especially for institutions that prioritise stability and customer or member continuity. However, by running modern, composable cores alongside existing systems, they can modernise key journeys first such as digital lending or new member onboarding, and expand over time.

This approach lowers risk, accelerates learning, and builds organisational confidence. More importantly, it aligns technology investment with business outcomes rather than treating transformation as a purely technical exercise.

Fintechs pursuing banking charters are not an existential threat by default to credit unions; instead, they are pushing fast-forward on modernisation. Community banks and credit unions still hold a powerful position in the financial ecosystem. Their model matters and their mission resonates, but mission alone won’t carry them through the next decade of innovation, competition, and consolidation.

The war on trust won’t be won with louder messaging or shinier apps. It will be won by the credit unions that build the structural agility to keep promises, adapt quickly, and meet customers and members where they are today and where they will be tomorrow.

Amber Harsin is Mambu’s VP of Credit Unions