By Kristen Christian | December 9, 2013
On the surface, community banks and credit unions may seem very similar. They both offer savings and checking accounts, loans, mortgages, online banking and bill payment, mobile banking, convenient ATM access and more.
The truth is, however, these two types of financial institutions couldn’t be more different. There are benefits and costs to both operations, and learning about the way credit unions work (and what sets them apart from banks) sheds some light on why Bank Transfer Day promotes credit unions as the best option for consumers.
While many community banks operate with a focus on community investment and charity work, each is still a for-profit bank with the same fundamental structure as a corporate bank. A bank uses customer deposits to create profits by investing or loaning it out to other customers. When you make a deposit or buy a savings product, you’re essentially loaning money to the bank.
Bank customers have no ownership interest in the institution, because every bank is owned by investors (who may or may not be depositors), and banks operate to earn a profit for those investors. Banks are owned and controlled by stockholders, whose number of votes depend upon the number of shares owned. Customers don’t have voting rights in major decisions and have very limited control over how the bank is operated.
This can include a decision to sell a community bank to a corporate bank. Members of a bank’s board of directors are paid employees chosen by the stockholders, and do not necessarily reflect the diversity of their customer base. The Savings & Loan bailout in the 1980s and the more recent bank bailouts of 2008 used taxpayer dollars. Competition between banks prevents a sharing of resources, which means ATM access may be limited or even non-existent outside of your local community.
Credit unions are not-for-profit financial co-operatives. Each credit union exists to serve its body of members and the community in which they live. When you deposit your money, you’re actually buying shares of the company. Rather than being just a customer, you’re a member-owner with a right to vote on major decisions affecting the credit union.
In addition, each credit union’s board of directors is comprised of volunteers elected from the member-owner base. Any profits a credit union earns allows for better rates on loans and savings, typically lower fees and other advantages. At the end of the year, any revenues beyond this are distributed to the membership through dividends.
Cooperation among co-operatives is encouraged by the sixth of seven guiding principles. The Shared Branching network offers members of participating credit unions access to 5,000 branch locations nationwide, 30,000 ATMs throughout the U.S. and Canada (including 5,500 at 7-Eleven® locations), and over 800,000 ATMs worldwide.
Credit unions are among the most stable institutions in America. In fact, in the entire history of American credit unions, taxpayer funds have never been used to bail out a credit union. If you like the idea of participating in a cooperative effort, joining a credit union can pay off in not only customer service and better rates, but in the community you call home.
To find a credit union in your community, visit http://www.asmarterchoice.org.
Spreading knowledge about the world of personal finance is what GoBankingRates aims to do, which is why we’ve teamed up with one of the most influential activists in the credit union space.
Kristen Christian, cooperative activist and creator of Bank Transfer Day, will be answering reader questions in her new monthly Q-and-A column to help educate the public about what credit unions are all about.
Do you have a question about credit unions? Submit a question for Kristen by sending an email to: [email protected].