Credit Unions

Credit unions offer local communities unique banking benefits by empowering local ownership and reinvesting in the community.

Learning Objective

Assess the value of credit unions, particularly compared to big banks and an understanding of risk

Key Points

Credit unions act as a substitute to traditional larger banks, focusing on providing local communities full ownership, voting rights, and funding through their emphasis on people rather than profits.
There are a variety of benefits when choosing a credit union instead of a bank, primarily revolving around supporting the community, minimizing risk, and achieving lower rates.
Credit unions also come with their fair share of downsides, most notably easy global accessibility, the benefits of scale, and access to riskier investment options.
When making a banking decision, consumers must carefully consider the pros and cons of credit unions before making a decision.

Terms

Credit unions
Cooperative banking institutions focused more on people and community, as opposed to profitability and global scale.
mitigating risk
Reducing the potential for losing capital, as well as gaining larger returns, through investing in more volatile options.

Full Text

Not A Bank

Credit unions are substitutes and competitors of banks, owned by members as a financial cooperative. As a result, credit unions tend to be smaller forms of cooperative banks that avoid borrowing, and operate solely upon the funding and liquidity enabled by the resources deposited by members.

The primary difference between a credit union and a bank from an operational perspective is best described via the decision-making system. The board of directors for a credit union is traditionally elected through a vote of all existing members, where each member gets one vote (regardless of the amount of capital one has invested). Credit unions pride themselves on being community-oriented, deliberately mitigating risk and serving people as opposed to pursuing profit.

The Pros and Cons

There are a variety of valid reasons to support credit unions, as well as a few downsides consumers should also be aware of:

The Good

Credit unions commit resources to the local community.
Credit unions usually offer better rates on deposits and lower costs for loans
Credit unions offer access to borrowing options not always available at traditional banks
Credit unions provide more personalized service
Credit unions increase competition (big banks tend to be oligopolies, while credit unions are intrinsically smaller in scale, thus high in quantity)

The Risks

Credit unions are usually region specific, so traveling can have some complexities in terms of support
Credit unions are smaller, and therefore more likely to go out of business
Credit unions are more vulnerable to risk, and thus may not be as willing as larger banks to lend money without confidence in repayment

While there are many considerations to be made when deciding on a banking option, credit unions are uniquely positioned to offset the downsides of big banks through avoiding risk while focusing on local needs. Big banks add advantage through scale (along with risk), providing more investment opportunities and global access to capital.

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