Credit Unions And Traditional Banks - There Is a Difference!

You're a member of a Credit Union and you're happy about that! Friendly people, good service and great rates. But really, what's the difference between banks and credit unions?

The single, most primary difference is simple - ownership.

Credit unions were born in the early 1900's and recognized and federally chartered in 1934 in the Federal Credit Union Act. Credit unions (cu's) are cooperative, non-profit, member run organizations. By law, CU members must share a " common bond of occupation or association, or (belong) to groups within a well defined neighborhood, community or rural district". The members are the owners and as such, credit unions are not publicly traded entities.

All proceeds are channeled back into the organization and essentially, with the addition of it's tax free status, subsidize the lower loan rates, higher dividend returns on investment tools and more personalized service. The tax exemption enjoyed by cu's means that earnings may be retained tax free and is justifiable because cu's, unlike banks, cannot raise equity in public offerings ( stock) and so, must be able to build capital internally. Banks, being based on a more capitalistic model, disagree with this and label it an "unfair subsidy".

Banks are 'for profit' companies, whose mandate is to return as much money as possible to shareholders, and in doing so, look at loans, investment products and other services as profit centers. Service often suffers, and in some cases, charge the customer for the privilege to talk to a live person on the telephone!

And there is the stability factor to consider: the case has been made ( by the Supreme Court, in a 1998 opinion) in that "... the ability of credit unions to "come through the depression without failures, when banks have failed so notably, is a tribute to the worth of cooperative credit and indicates clearly the great potential...".

This basic difference in business models makes for a contentious relationship between banks and credit unions, with the banking industry frequently lobbying Congress to strip or restrict the basic device that makes credit unions work, namely the non-profit status.
In terms of market share, credit unions number somewhat over 10,000 (with 85 million members) nationwide, compared to nearly 7,900 commercial banks and 1,500 insured savings and loans / mutual savings banks. Though numerically outnumbering banks, the assets of the CU's ($575 billion) are quite small compared to the banks ($7,075B) and thrifts (1,359B).

That the banking industry will continue to lobby against the credit union is a sure bet; chief among the charges is that credit unions are " inherently more inefficient because of the one member - one vote structure. A second argument ( one that is 180 degrees opposed from the first) supposes that cu's operate efficiently enough to offer better terms and credit services than the banks, due in part to tax exemption. Interestingly enough, banks and thrifts receive publicly funded assistance as well, in the form of deposit insurances and entry restrictions.

References
The Federal Reserve Bank of Saint Louis, "Credit Unions Make Friends - But Not With Bankers" Oct 2003
St. Petersburg Times OnLine, "Banks vs. credit unions/; Sparring over taxes", Dec 2002
Wisconsin state Journal, "Credit Union Conversions Panned", Feb, 2006
www.cuna.com

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