by: Israel Ramirez, Business Development & Software Engineering Intern
At a time when Americans have many options for financial institutions, many opt for their local credit union for basic financial services. As of 2019, there are 5,236 credit unions supporting 120.4 million members in the United States. So, what exactly are credit unions and how are they different from traditional banks?
Credit unions are member-owned, nonprofit financial institutions that provide basic financial services and credit at competitive rates, while emphasizing the importance of excellent customer service and community involvement.
Credit Unions Require Some Sort of Affiliation to Join
In order to join a credit union, you need to qualify for membership. Credit unions have their own set of qualification requirements which vary depending on the Credit Union’s affiliations. Common affiliations include an employer, school, church, or town. While these requirements may paint credit unions as exclusive, most consumers will have the ability to join a credit union through some means; the easiest ways to qualify tend to be through an employer or residence in a certain location.
Credit Unions are Non-Profits Owned by their Members
A credit union is a non-profit financial institution where the members themselves own the credit union as opposed to a corporate entity. Since credit unions are member-owned and non-profit, their primary obligation is to serve their members, unlike banks who need to meet target profits for their shareholders.
As co-owners, credit union members have a financial stake in the institution. Credit unions require all members to deposit a certain amount of money in their savings account, which is referred to as a “share account.” Banks, on the other hand, have external shareholders who are not required to become members of the bank. So in summary: members are largely only customers at banks whereas, at credit unions, they’re also shareholders.
Credit Unions Really Care about their Members
Credit unions are known for their efforts in helping the communities they serve such as through giving scholarships to local college students, participating in fundraisers, or leading community service initiatives.
During the Covid-19 pandemic, for instance, credit unions and community banks have recognized the financial constraints that many families and small business owners feel, operating far less discriminatorily in allocating grants.
For instance, due to the rocky rollout of PPP in early April, many small businesses had trouble applying and ultimately receiving loan applications from their financial institutions. The PPP funds quickly ran out by April 20th, serving only 18% of 30 million small businesses.
Whereas banks were more stingy in allotting loans to small businesses during this rollout, credit unions were more responsive and likely to lend. Credit unions also found other ways to provide relief to small business owners, such as through deferring pre-existing loan payments and other consumer options. This generosity on behalf of credit unions stems from their general philosophy and speaks to their community-orientation; it’s more likely that members are familiar with the staff at credit unions and these personal connections lead to faster responses.
Credit Unions have Unique Member Perks
Since credit unions are smaller than corporate banks, they have the ability to add a more personal touch to your banking experience. This touch comes in the form of bespoke and attentive customer services such as financial literacy resources through personal counseling and coaching. Credit unions also have more forgiving policies in cases such as overdraws or low credit scores. According to the 2017 American Customer Satisfaction Index Finance and Insurance Reports, customers rated credit unions higher than banks, with a score of 82 out of 100 compared to 81 for banks. However, it has to be taken into consideration that the most recent 2019 ACSI report has banks averaging a better rating than credit unions for the first time in ACSI history, with banks receiving a score of 80 and credit unions receiving a score of 79. Experts attribute this breakthrough to an emerging digital gap between retail banks and credit unions.
What about Banks? Do they have Benefits?
If you’re looking for more personalized service or favorable rates and fees, definitely consider a credit union. As proven above, they have a lot of benefits. If you’re mainly seeking convenience and eligibility, though you should also consider a bank. For example, if you relocate often, you might find credit union eligibility difficult to maintain. Similarly, if you want universal service location, a bank is your better bet. Banks also offer a wider variety of banking services and products such as different types of investment accounts, personal savings accounts, and loan options. While credit unions have these products, they tend to be more limited in scope. Lastly, consider the fact that larger banks generally adopt new digital solutions more quickly than credit unions due to their size and spending power. If your digital experience is very important to you but you still want to join a credit union, make sure that the credit union you’re joining prioritizes digital banking and leverages tools such as chatbots and conversational phone technology.
In summary, a credit union differs from a bank because of its non-profit status, member ownership and community-centric style of operations. Whereas credit unions’ primary obligation is to serve their members, banks prioritize meeting target profits for their shareholders.
So should you join a credit union or bank? Ultimately, your decision between a bank or a credit union should rely on what institution is best suited to your personal needs based on your lifestyle and future plans.