If you’re not quite sure what the difference is between banks and Credit Unions (CUs), this article compares the significant differences and will help you discover how CUs can offer benefits banks can’t match.
SEE WHY CUs ARE THE SMART CHOICE:
- What is a credit union?
- How do banks and CUs differ in structure and membership?
- How do they compare in rates and fees?
- How do they compare in market share and asset growth?
- What about taxes?
1. WHAT IS A CREDIT UNION?
CUs are financial institutions formed by an organized group of people with a common bond. Members of CUs pool their assets to provide loans & other financial services to each other. Unlike banks, CUs exist solely to serve their members; & do not have to pay dividends to an outside group of stockholders. Instead, CU income is returned to members in the form of better rates, lower fees and innovative services. CUs promote the financial well-being of members, including those of modest means, through a system that is cooperative, member-owned, volunteer-directed & not-for-profit; therefore a credit union will look for ways to keep the costs as low as possible for the members while remaining competitive, safe and sound, rather than looking for ways to make a profit for stockholders.
2. HOW DO BANKS AND CUS DIFFER IN STRUCTURE?
CUs are member-owned, not-for-profit financial cooperatives. As a result decisions are based on meeting the financial needs of the membership. Here are some facts about how we operate:
- CUs operate under a “one member = one vote” system, regardless of the amount of money the member has at the CU.
- Most CUs have volunteer, unpaid boards that are elected by the members of the CU.
- Under federal & state laws, CUs may only offer membership to individuals who belong to a select group or defined by specific geographic boundaries.
- Banks are for-profit financial corporations controlled by a board & stockholders who hold influence in the bank based on the value of their shares. Customers of a bank (who are not stockholders) do not own a financial interest in the bank. Here are some facts about how banks operate:
- Boards are compensated for their service.
- Profits of banks are divided among the stockholders.
- Banks face limited or no restrictions on who they serve
3. HOW DO BANKS AND CUS COMPARE IN RATES AND FEES?
Banks usually require a higher minimum deposit of $50 to $100 to open an account. Compared to CUs, banks generally pay customers lower interest rates on deposit accounts & charge higher rates on loans. Earnings from a bank are given to stockholders as profit sharing.
Membership in a credit union requires a deposit of as little as $5. CUs offer attractive pricing that puts pressure on the other financial institutions to offer more attractive rates, although in many cases not as low as a credit union. Without CUs, bank customers would most likely pay more for financial services.
4. HOW DO BANKS & CUs COMPARE IN ASSETS & MARKET SHARE?
- Total credit union assets are $1.03 trillion compared to $14.45 trillion total bank assets
- The largest bank (JPMorgan Chase) has $1.9 trillion in assets, more than all US CUs combined
- Average credit union asset size is $148.8 million vs. $2.04 billion average bank asset size
- CUs have grown to $1.03 trillion in 108 years, while banks grew $559 billion in 2012 alone
- At the end of 2012, the total credit union market share was 6.7%, while total bank market share is 93%
5. HOW DO BANKS AND CUS DIFFER WHEN IT COMES TO TAXES?
CUs were granted (by Congress) a federal tax exemption based on their unique structure as non-profit cooperatives. Therefore, CUs do not pay federal income tax on earnings; however, state-chartered CUs do pay other relevant taxes such as payroll, property and sales taxes.
Banks do not have a tax exemption because they are a for-profit business intended to provide profits to their stockholders. So, banks do pay federal income taxes on corporate profits—although 29% of banks operate under subchapter S of the IRS Code which provides significant tax breaks.