Credit Unions vs Banks
by Bill Haden, SVP / Business Banking Group Manager, Scott Valley Bank
You may ask yourself why a banker would choose to write commentary about credit unions for publication to be read by fellow employees and clients. The answer to that question is not complicated. As business people, we should be aware of changes taking place in our industry. We should examine patterns or shifts as they occur and be aware of new competitive pressures. Simply, it is foolish to ignore our rivals and not recognize steps that we may need to take to stay viable in the markets we serve. This applies to all business segments. We should be prepared to analyze what our competitors are doing well and not let our egos get in the way of good business decisions. None of us should get accustomed to looking at things the same old way and hope to prosper.
So, to the subject of credit unions . . . There are currently over 96 million credit union members in the United States. The largest American-based credit union is Navy Federal which serves U.S. Department of Defense employees, families and contractors. They have over $45 billion in assets and approximately 3.4 million members. Total credit union assets in the United States reached $1 trillion as of March 2012. These statistics should pique your interest. Credit unions are fast growing and a competitive financial service provider in our Country. They have made deep inroads into American households.
Let’s continue our discussion with a brief history of credit unions and perhaps that will help us understand the evolution and strength of their industry. The credit union movement began in the 1800’s in England with a fairly simple yet noble design. People of the middle or working class could achieve a better standard of living for themselves and others by pooling their resources (savings) and making loans to neighbors and co-workers with a common bond. The common bond or bond of association is the social connection among their members. Current examples of that social connection are the development of the Teachers Credit Union, Wood Products, Nurses, Police, Firemen, Federal Employees, Government Employees just to name a few.
Credit Unions have provided service to their members in the United States for over 100 years. In 1934, President Franklin Roosevelt signed the Federal Credit Union Act and the Credit Union National Association (CUNA) was formed to provide insurance, auditing, and supplies to credit unions around the country. In August of 1998, President Bill Clinton signed the Credit Union Membership Access Act, providing credit unions the ability to expand their membership beyond the common bond previously required which allowed them access to a much broader market. They still replicate the same basic early structure and characteristics of their English originators that include:
Each member has one vote
A member elected board of directors
Volunteer based board involvement
Federal Credit Unions have deposit insurance very comparable to banks. Deposits are insured up to $250,000 backed by the full faith of the U.S. government and administered by the National Credit Union Association (NCUA). As you probably know, banks have the same limit of deposit coverage administered by the Federal Deposit Insurance Corp. and which is also backed by the full faith of our government.
In recent years, credit unions have successfully lobbied to expand their product set to include more business and commercial real estate loans. This represents another change in their original charters. Historically, credit unions were focused on consumer products and services. Remember, their original mission was to make loans to neighbors and co-workers with a common bond. Suddenly credit unions are starting to look like commercial banks. They will be able to provide the same products and services with a distinct pricing advantage.
Like banks, credit unions make money on their Net Interest Margin (NIM). This is the difference between what they charge on loans (income) and what they pay out for deposits (expense). They traditionally pay more for deposits and their loan rates are historically low. They are able to do this because credit unions are exempt from Federal and State income taxes. Yes, that’s correct; credit unions pay no State or Federal income taxes. This is a huge difference between banks and credit unions and provides them with an obvious pricing advantage.
There is a clear paradigm shift occurring in the financial services industry. Credit unions are gaining momentum as they expand their product set and are becoming a more powerful force. They are reaching out to a broader client base with competitive deposit and loan rates. Banks need to be aware of this significant player that continues to gain power in their market. Competition creates a healthy environment and should force banks to become more resourceful to stay prosperous in the markets they serve. The clear winner will be the consumer and small business owners.
“I have been up against tough competition all my life. I wouldn’t know how to get along without it.” Walt Disney