Credit unions are not corporations, limited liability companies, or subchapter S corporations. They’re cooperatives[1]—co-ops, for short.
What, exactly, does this mean?
Technically, a cooperative is “an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned enterprise.”[2] So, because they’re cooperatives, credit unions are groups of consumers working together toward a common goal.
This “working together” means jointly owning and controlling the credit union:
This—the ownership structure—is a key difference between credit unions and banks. Stockholders own banks. Customers own credit unions[4], but customers at credit unions are more correctly called “member-owners,” or just “members.” This is true for all credit unions, regardless of size, product suite, or location in the USA.
So, member-owners own credit unions, stockholders own banks.
This fundamental, structural difference leads to other significant differences between banks and credit unions. Yet, because effective delivery of retail financial services leads to similar service delivery by banks and credit unions, it’s easy for a shallow review of banks and credit unions to miss some of the differences between the two.
Some of the differences that arise from the customers being owners are:
| Banks | Credit Unions | |
|---|---|---|
| Pricing for customers | Focused on returning profit to stockholders | More favorable pricing for member-owners. [5] |
| Service | Service levels determined by how they affect profit for stockholders | Service levels determined by a focus on helping the member. [6] |
| Ownership of equity | Owned by stockholders | Owned by depositors—member-owners. |
| Governance | Governed by stockholders based on amount of stock held | Governed by member-owners—each gets 1 vote for the board of directors, regardless of amount business done with the credit union. [7] |
Bankers like to employ the idea that if it walks and talks like a duck, it’s a duck. From the street, a credit union looks like a bank, therefore . . . .
Well, yes. A credit union is a financial institution. So, from the street, it looks like a bank. However, it’s a different kind of financial institutions. A cooperative financial institution. A bank is a for-profit financial institution.
As it turns out, there are 130+ kinds of ducks. Mallards, canvasbacks, ruddy ducks, redhead ducks, buffleheads, hooded mergansers, and many, many more.
There are also many kinds of financial institutions, and they’re all different. Credit unions happen to be cooperative financial institutions, which makes quite a large difference in the end.
[1] https://www.communitywestcu.org/creditunionprinciples/
[2] https://www.ica.coop/en/cooperatives/cooperative-identity/
[3] https://en.wikipedia.org/wiki/Cooperative
[4] https://www.forbes.com/advisor/banking/difference-between-bank-and-credit-union/
[5] https://www.moneyunder30.com/credit-unions-vs-banks
[6] https://yourmoneyfurther.com/FRIENDLY-SERVICE
[7] http://legacy.cuna.org/training-education/download/V100_CH1.pdf
