During the 2008 financial crisis, many people began losing their faith in the American banking system. With a storm approaching and systemic risk seeming inevitable (in which banks are so heavily interconnected that the failure of one would lead to a failure of them all), countless banks were forced to fess up to the risky practices they’d been engaging in for years, in hopes of a financial bailout to preserve the stability of the system.
At first, the government was hesitant to play such a large role in the markets, but after Bank of America was forced to buy Merrill Lynch and Lehman Brothers collapsed – which dragged the Dow Jones down 504 points (biggest drop since 9/11) and rocked the global markets in an unprecedented way – it became clear that governmental intervention in the American banking industry was needed. Not only did the Treasury Department expend $200 billion in the Capital Purchase Program, but an additional $500 billion was doled out to failing banks in hopes that the government could single-handedly save Wall Street from its self-inflicted woes.
Although public backlash against the banks has waned in recent years, the fact remains that people are still wary of banks and seek other alternatives. An optimal choice? Credit unions, or non-profit, cooperative financial institutions based on a common bond between members, such as employment/occupation, community, or education. Rather than bringing in capital from countless outside sources, members pool their shares and savings deposits to create loans for others within the same credit union. Like other banks, credit union members have access to savings and checking accounts, CDs, mortgage loans, business loans, debit cards, and credit cards.
While credit unions may sound ideal for your financial situation, are they preferable to commercial banks? Let’s examine this through four main points of analysis.
Stockholders vs. Members
A typical commercial bank is both owned and controlled by its stockholders, meaning they have the final say in many decisions the bank makes regarding its financial practices and customer services. Stockholders receive a share of the bank’s profits, proportional to the number of shares they own. Because banks are for-profit institutions, they look for ways to optimize the profit potential of the bank whose shares they own and they elect paid board members to help facilitate those decisions. Unlike the volunteer board members within a credit union, commercial bank board members may or may not even use the bank’s services, and are there for the purpose of growing the bank as a business.
Credit unions, on the other hand, are non-profit institutions with the primary purpose of serving the financial needs of their members. These members elect their board from a pool of members within the community. Your membership in the credit union effectively makes you a part owner.
Credit unions require their potential members to meet certain membership requirements, such as being a part of a specific community or association. For example, a company’s credit union may only be available to employees of that company, whereas a teacher’s credit union will only allow teachers or employees of a certain school district.
Lower Fees and Higher Returns
Because of the for-profit versus non-profit differences, fees charged are generally higher at commercial banks than credit unions. As we saw in 2011, Wells Fargo and Chase faced harsh customer backlash after implementing fees on debit cards; so harsh, that the banks eventually rescinded these fees.
There are still dozens of other ways banks can profit off their customers, however. Minimum balance requirements with a nice hefty fee if you fall below a given threshold on your account, overdraft fees, minimum set up of direct deposits, and there are even fees for transferring too much or too many times between your savings and checking accounts.
Credit unions generally don’t charge monthly servicing fees or have minimum balance requirements (unless very small, like a minimum balance of $1) and while they usually charge overdraft fees, the amounts are significantly lower than what you’ll see at a commercial bank. Credit unions have simpler rules and fewer complications with checking and savings accounts.
What about returns on investment? Funds that would have been doled out to stockholders are instead applied to lowered interest rates on loans and higher interest rates paid on savings deposits at credit unions. Interest rates at banks are at an all-time low in wake of the financial crisis and the Federal Reserve’s fiscal policy, increasing the favorability of credit unions because when you make your money work for you, the return on investment will be much higher.
To sum up, credit unions pay you higher interest rates on your savings, money market, checking accounts and CD investments. Furthermore, credit unions charge lower interest rates/APRs and fees for their financial products, such as credit cards, mortgages, and business, personal, and car loans.
The number one goal of commercial and institutional banks is to obtain maximum profitability; after all, profitability drives share price and management compensation. On the other hand, the number one goal of credit unions is to provide their members with stable financial services. Customer service, while quite acceptable at commercial banks, is generally better at credit unions because you are already a part of a community and the profit motive is notably absent.
Credit unions don’t view you as another component to a banking machine or just another opportunity to make money; you’re a valued member of their community. There are incentives to help out other members, even ones with a troubled financial history or low credit scores, and work collaboratively with credit unions, whereas with banks, the customers’ needs are sometimes at odds with the vision of board members and stockholders. By offering the cheapest interest rates and fees, commercial banks can not grow revenue and profits.
While it can be argued that credit unions are preferable in most instances, the greatest downside to using a credit union over a bank is a matter of convenience. Due to their small, localized nature, credit unions usually don’t offer 10 different types of checking and savings accounts, investment products, or expansive credit card offerings. While some have online banking options, they can’t compare with the thoroughly developed online banking systems offered by major commercial banks because the funding they would use to develop their online services is instead doled out to members’ savings deposits.
Credit unions also have fewer branches and ATMs with shorter business hours because the availability of funds to pay workers is less through a credit union than a bank. The inconvenience of having to drive further to access your money can be annoying when physically depositing checks or pulling cash from your account. However, the positive can be that you will be less likely to spend money on frivolous or compulsive purchases, and can use a credit union as a secondary or emergency option.
Credit Union or Bank For You?
A credit union is a reasonable option for those who are looking for simplified banking services – such as checking and savings accounts, bill paying, debit or credit cards – and don’t require an extensive array of financial services. Convenience is a minor detriment, but in comparison to the hundreds, if not thousands, of dollars you could potentially save in banking fees and lowered interest rates on credit cards and loans, credit unions still outweigh in terms of overall benefits.
There are also higher interest rates on savings to consider, as well as the member-controlled governance in which you have more of a say in the credit union’s operations than you would at a bank. For me personally, I maintain accounts at both types of banks just to keep my options open and compare financial products when shopping around. The benefits are aplenty, but ultimately, it’s up to you to determine whether a credit union or commercial bank is right for you and your financial needs.