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Friday, February 4, 2011

The difference between banks and credit unions

Banks and Credit Unions are both financial institutions that provide financial services, however several differences distinguish the two types of financial organizations. This article will discuss the difference between banks and credit unions in terms of four key areas regulatory bodies,  primary interests,  deposit insurance and   financial services.

It will become clear through illustration of these differences, that banks and credit unions are indeed substantially unique financial institutions in their own right. Moreover, each has different advantages and disadvantages to customers. The video below describes the differeneces between banks and credit unions in terms of  the three "O"s, ownership, objective and operation.

Regulatory legislation and agencies

Credit Unions are regulated by the Federal Credit Union Act of 1934 in addition to some shared regulatory legislation with banks such as the Fair Credit Reporting Act and The Depository Institutions Act of 1982. However, banks are regulated by the Federal Reserve Board and the Federal Deposit Insurance Corporations which credit unions are not. Moreover, credit unions are regulated by the National Credit Union Association (NCUA) , whereas banks are not. Some federal agencies and supervisory organizations such as the Office of Comptroller of Currency (OCC) and ,the Securities and Exchange Commission (SEC) may oversee aspects of both bank and credit union operations. Laws governing both U.S. banks and credit unions are codified in Title 12, of the U.S. code.

Shareholder profit vs member ownership

The primary interests of a bank or credit unions are those parties who's objective(s), the financial institutions represent. For banks, the shareholders and owners are both influential and an important interest be they private or public, Credit Unions on the other hand are member owned and thus the members' interests are of primary interest. This is not to say there are no additional interests in these financial institutions as there may be administrative, employee, regulatory and commercial interests as well. However, since these latter interests may be common to both banks and credit unions, the difference in ownership interest is a more distinct difference of interest.

Federal deposit insurance

A second difference between banks and credit unions are in how they are insured, and regulated. Bank deposits are insured by the Federal Deposit and Insurance Corporation (FDIC) whereas Credit Union deposits are insured by the National Credit Union Share Insurance Fund (NCUSIF). Both these organizations are Government chartered to protect both confidence in financial service institutions and the public's money through deposit insurance. Currently, in 2010, this insurance protects up to $250K of deposits for each account for both banks and credit unions; however this amount was originally intended revert back to $100K of insurance following the fallout from the 2008 financial crisis.

Scale of financial services

Banks generally have greater legal, service, and financial scope. The financial services offered by banks and credit unions are largely the same, however the policy regarding these services can be quite different between the two due to the primary interests. Since banks are more concerned with profiting owners, bank members may be subject to more penalties, more service fees or surcharges, and higher interest rates whereas credit unions are more concerned with benefiting members who's interest is not paying more than they need to for services and financing. For example, a bank may charge for use of online banking and bill pay whereas a credit union may not if it can remain financially solvent and functional without such fees.

The difference between banks and credit unions can be good and bad for consumers. For banking clients, the number of service options, bank products and access to financing is generally higher, albeit mostly at a higher cost. However, credit unions are efficient and affordable for small loans, cash deposits and basic financial services. Many credit unions are also smaller and have members who often share a common interest such as place(s) of employment, and industry affiliation. In other words, credit unions are more individually, occupationally, and member focused whereas banks may be more commercially, profit and economically orientated.