While banks and credit unions are both financial institutions that offer similar services (such as accepting deposits and lending money), the main difference between a bank and a credit union is that "customers" of a credit union are members and they own the institution.
A bank is an institution that accepts deposits and channels those deposits into lending activities, either directly or through capital markets. A bank exists with a profit motive - to generate income for its shareholders.
On the other hand, a credit union is a cooperative financial institution that is owned and controlled by its members and operated for the purpose of promoting thrift, providing credit at reasonable rates, and providing other financial services to its members. Most credit unions are not-for-profit.
This is perhaps the best criteria to differentiate a bank and a credit union in. Initially, banks were institutions established by the state or national governments for lending and borrowing purposes. Gradually, they were privatized and came to be owned by shareholders who invested in them in the hope to get higher returns.
Credit unions, on the other hand, are owned by those people who maintain accounts with them. These owners elect their board of directors on a one person one vote system. The basic principle behind operating a credit union is to maintain capital and solvency. They do not operate in order to earn profits but function to support the owners financially and reward them with lower interest rates and other perks if the revenues generated are high and in excess.
edit Profit Motive
Banks operate purely on a profit motive - to make money for shareholders. With fiduciary responsibility, most banks are required to profit from their daily activities in order to survive. They earn their profits by charging interest and fees while conducting activities like lending money, allowing withdrawal of money etc.
Credit unions, on the other hand are ‘not-for-profit’ institutions. These organizations do not function to earn a profit from their daily activities but do so to give their customers maximum benefits in terms of higher returns on investments and lower interest fees. Note that credit unions are not non-profit i.e. their "not-for-profit" status still means that even though they do not exist to turn a profit, they still have to make some net income in order to remain solvent and retain adequate capital to service their customers/members.
edit Are deposits insured?
Some individuals and businesses are concerned about the solvency of their financial institution. The question they have is whether their deposits are "safe" in the event that the bank loses money on its investments and lending operations.
The Federal Deposit Insurance Corporation (FDIC) is a government organization that provides insurance on deposits being held at banks. This is to ensure the safety of the money stored in the bank. The FDIC provides insurance up to $250,000 per depositor per bank. The organization has a large network and insures deposits at over 7,800 institutions. Note that a bank needs to be an FDIC member in order for deposits in that bank to be insured. The FDIC also insures US branches of foreign banks.
Just like the FDIC insures deposits in banks, the National Credit Union Share Insurance Fund insures deposits in credit unions up to a total of $250,000 in individual accounts. This insurance applies to accounts at those credit unions that are members of CUNA (Credit Union National Association).
As of June 30, 2010, there were a little over 7,800 banks and savings institutions in the U.S. with an asset base of $13.3 trillion, virtually all of them FDIC insured. In Q1 2010 there were a little more than 7,600 credit unions in the U.S with total assets of about $909 billion.
In the fall of 2011, several banks including Bank of America, Wells Fargo, Chase and Citibank announced debit card fees i.e. fees they would charge certain consumers for using their debit cards. After a sea of negative feedback, they retreated from the proposal and revoked the fee. However, the Credit Union National Association (CUNA) reported that 650,000 joined credit unions since Bank of America announced its $5 monthly debit card fee in September 2011.
Bank Transfer Day, a grassroots movement, was launched on Facebook in response to such fees and urged consumers to switch from large banks to smaller, local financial institutions by November 5, 2011. The movement was fairly successful, garnering over 40,000 "likes" in less than two months.
edit Pros and Cons
edit Advantages of Credit Unions
Credit unions tend to focus on better customer service because the customers are, in effect, the owners of the credit union. Their not-for-profit nature also allows them to charge lower fees and lend money at lower interest rates. However, it should be noted that credit unions also need to have a net income so it is very possible that a bank may be able to match the interest rate and APR offered by a credit union.
Credit unions are also known for their transparency in management because the Board of Directors are elected from within the group of members. Customers also have a say in how the institution is run because they themselves are the representatives of the institution.
edit Advantages of Banks
Banks, especially the larger ones can usually provide a wider range of investment products and services. Banks also tend to be more sophisticated with their online tools and mobile applications. Another advantage of large banks is their network of ATMs that allow customers to withdraw cash from convenient locations.
edit Videos explaining the difference
Banks vs. Credit Unions - YouTube video Part 1
Banks vs. Credit Unions - YouTube video Part 2
TV clip explaning the difference between Banks and Credit Unions
edit History and Evolution
Various letters of credit known as Sakks were issued by banks located in Persian territories during 3rd century AD. In 1407, the first known state deposit bank was founded in Genoa, Italy. Beyond that time period, the Bardi and the Peruzzi families were known to have dominated the banking industry during the 14th century.
Credit unions are relatively newer as compared to banks because the earliest known evidence of their existence dates back to 1852. Franz Hermann Schulze-Delitzsch is credited with the establishment of the first credit union institutions in the world which were located in Eilenburg and Delitzsch. Later in 1864, Friedrich Wilhelm Raiffeisen founded the first rural credit union in Heddesdorf in Germany. The Caisse Populaire de Lévis was the first credit union in Quebec, Canada, North America and it began operations on January 23, 1901 with a ten cent deposit. St. Mary's Bank Credit Union of Manchester, New Hampshire, in the United States holds the distinction as the first credit union. Filene is known to have created the Credit Union National Extension Bureau.
One can find a variety of different banks within the community. These include:
- Commercial bank which is the term used for a normal bank to distinguish it from an investment bank.
- Community banks are locally operated financial institutions that empower employees to make local decisions to serve their customers and the partners.
- Community development banks are regulated banks that provide financial services and credit to under-served markets or populations.
- Postal savings banks are savings banks associated with national postal systems.
- Private Banks are banks that manage the assets of high net worth individuals.
- Offshore banks are defined as banks located in jurisdictions with low taxation and regulation. Many offshore banks are essentially private banks.
- Building societies and Landesbanks: institutions that conduct retail banking.
- Ethical banks: banks that prioritize the transparency of all operations and make only what they consider to be socially-responsible investments.
- Savings Bank is a bank whose objective is to provide easily accessible savings products to all strata of the population.
The two main types of credit unions (and they are not mutually exclusive) are:
- Credit unions that serve individual customers
- Credit unions that serve corporate customers
- Number of banks insured by FDIC
- Profile of Credit Unions in the U.S. (Q1 2010)