While banks and credit unions are both financial institutions that offer similar services (checking and savings accounts, auto loans, and mortgages), 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 a company, and like most companies, a bank aims to maximize profits for its shareholders. A credit union is a cooperative — and often not-for-profit — institution that is owned by its members (customers) who democratically elect a board of directors. Credit unions tend to focus on members' needs and attempt to provide credit at reasonable rates. There are pros and cons to participating in either financial institution.
|Owned by||Banks are owned by shareholders.||A Credit Union is owned by its members, who are depositors of money in the institution.|
|Profit motive||Banks aim to make a profit for share holders.||Credit unions are not for profit. Any money left over after expenses and reserves is passed back to customers (members) in the form of lower fees, lower loan rates, higher deposit yields and free services.|
|Types||Commercial bank, community bank, community development banks, savings bank, postal savings bank and private banks||Consumer credit unions & corporate credit unions.|
|History||Letters of credit used in the 3rd century. Muslims used banking services in the 9th century. 12th century archeological finds include cheques.||Credit unions are relatively newer as compared to banks because the earliest known evidence of their existence dates back to 1852.|
The biggest difference between banks and credit unions comes down to ownership. Originally — and as is still the case in some countries — banks were institutions established by state or national governments for lending and borrowing purposes. Gradually, banks were privatized and came to be owned by shareholders who invested in them in the hopes of getting higher returns.
Credit unions, on the other hand, are owned by their customers, the people who maintain accounts with them. Members of a credit union elect the institution's board of directors on a one-person, one-vote system. The basic principle behind operating a credit union is to maintain capital and solvency. In most all cases, credit unions do not operate to earn profits, only to support their owners financially and reward them with lower interest rates and other perks if generated revenues are high.
Banks operate purely on a profit motive — to make money for shareholders. Most banks are required to profit from their daily activities in order to survive. They earn their profits by charging interest and fees on most financial services, including credit cards and loans.
Credit unions, on the other hand, are usually not-for-profit institutions. These organizations do not function to earn a profit from their daily activities, but when profits are made they are passed on to customers directly in terms of higher returns on investments and lower interest fees. Note that credit unions are not nonprofits, as they do have to make some net income to remain solvent and retain capital; "not-for-profit" instead refers to how credit unions operate in regard to earnings.
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. A bank needs to be an FDIC member in order for deposits into that bank to be insured. The FDIC also insures branches of U.S. banks in other countries.
Just like the FDIC insures deposits in banks, the National Credit Union Share Insurance Fund, which is backed by the government, 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 Credit Union National Association (CUNA).
As of December 2013, there were just under 6,900 FDIC-insured banks in the U.S. with a total amount on deposit of $9.6 trillion. In 2012, there were a little more than 7,160 credit unions in the U.S. with $1 trillion in assets.
In the fall of 2011, several banks including Bank of America, Wells Fargo, Chase and Citibank announced that they would begin charging fees for debit card use. Following substantial negative feedback, they retreated from the proposal. However, the Credit Union National Association (CUNA) reported that 650,000 joined credit unions following Bank of America's announcement of its $5 monthly debit card fee in September 2011.
A grassroots movement, Bank Transfer Day, was launched on Facebook in 2011, in response to such fees. It 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.
Pros and Cons of Banks and Credit Unions
While credit unions' ownership structure may seem very appealing, there is no clear "winner" in the bank vs. credit union debate. There are advantages and disadvantages to both.
Because credit unions directly depend on their members, customer service experiences at these institutions tend to be very good. In a 2012 customer satisfaction survey, credit unions received a customer satisfaction score of 82 compared to banks' overall score of 77. Smaller banks were more likely to receive higher customer satisfaction ratings than big banks, like Bank of America, which scored 66.
In general, credit unions offer higher interest on savings accounts and lower interest rates and fees on loans. However, when dealing with large loans, such as mortgages or auto loans, it is wise to check around for the best rates. Some large banks will compete against credit unions by matching or even beating their interest rates. Independent small lenders that specialize in mortgages (like  and Provident) are likely to offer better rates than both banks and credit unions but usually end up selling their mortgages to large banks within a month.
Though banks — especially large banks — are often known for their fees, credit unions have been the ones to increase overdraft fees in recent years. Generally, credit unions have fewer (or no) fees, while banks have a number of different fees, but every financial institution is different. Ask for a fee schedule before signing up for any financial account.
Sometimes banks have perks that credit unions do not, especially when it comes to accessibility and usability. While credit unions have done much in the last 15 to 20 years to expand their branches and networks of ATMs, credit unions are still usually smaller and have fewer connections than banks do. If having a full range of services available at all times, from all places, is mandatory, a large bank is likely the better option.
Letters of credit known as Sukuk were issued by banks located in Persian territories during the 3rd century CE. In 1407, the first known state deposit bank was founded in Genoa, Italy. The Bardi and the Peruzzi families were known to have dominated the banking industry during the 14th century.
Credit unions are newer than banks, with the earliest known evidence of their existence dating back to 1852. Franz Hermann Schulze-Delitzsch, a German economist, 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, Germany.
The Caisse Populaire de Lévis was the first credit union in Quebec, Canada; it began operations on January 23, 1901, with a ten-cent deposit. St. Mary's Credit Union of Manchester, New Hampshire, in the United States holds the distinction as the first U.S.-based credit union. Edward Filene played a vital role in expanding credit unions in the U.S.
Types of Banks and Credit Unions
There is usually a wide variety of different banks within every community. Some common types of banks include the following:
- Commercial bank is the term used for a normal bank to distinguish it from an investment bank (though there may be considerable overlap between the two).
- Community banks are locally operated financial institutions that empower employees to make local decisions to serve their customers and the partners. See also Branch Banking vs Unit Banking.
- Community development banks are regulated banks that provide financial services and credit to underserved markets or populations.
- Investment banks offer specialized banking services and focus on complex investment transactions.
- Postal savings banks are savings banks associated with national postal systems.
- Private banks are banks that manage the assets of individuals with a high net worth.
- 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 are institutions that conduct retail banking. The latter term is German.
- Ethical banks prioritize the transparency of all operations and make only what they consider to be socially-responsible investments.
- Savings banks are banks whose objective is to provide easily accessible savings products to all demographics in a population.
The two main types of credit unions (that are not necessarily mutually exclusive) are:
- Credit unions that serve individual customers.
- Credit unions that serve corporate customers.