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.