Although they may look similar on the surface, credit unions and banks are structured quite differently.
Banks are typically owned by a group of individuals that have invested their money in a business with the purpose of attracting deposits and making loans. Those owners earn a profit from the operations of the business.
In both cases, the owners aren’t necessarily the same people as the bank customers, who generate the profit enjoyed by the owners. Generally, they’re two distinct groups.
On the other hand, credit unions are cooperatives. As the word implies, credit unions are formed when people get together to cooperate with a common goal in mind. Their common goal is to help each other with their saving and borrowing needs. So, they pool their deposits, and then make loans to each other with those deposits.
The people who pooled their money—the depositors—are the owners. Together with other depositors, they own the credit union as a group. They cooperate by forming the cooperative. There is no separate group—there’s only one group of people.
In practical terms, this means that each person who deposits funds into the credit union becomes an owner of equal proportion with every other owner. They own it mutually, cooperatively.
This was recognized a far back as 1917, when the US Attorney General Thomas Watt Gregory gave a legal opinion regarding credit unions organized in Massachusetts. He said, “Credit unions . . . being in substance and in fact the same as ‘cooperative banks . . . organized and operated for mutual purposes and without profit’ . . . are exempt from taxation.”[1]
That phrase “mutual purposes”, highlights the reason for the existence of credit unions—to mutually benefit the members.
There are many business cooperatives in various economic segments, such as farmers cooperatives and retail cooperatives. Many of those cooperatives sell retail goods to people outside the cooperative. For example, a farmers’ cooperative might provide a means for member farmers to move their goods to a retail environment, where they’re sold to people who aren’t farmers in the cooperative.
Credit unions are unique in that the entire cooperative is self-contained. The members are providing services to themselves for their mutual benefit.
This structural difference between banks and credit unions lies at the very foundation of the institutions, and affects the decision-making of the organizations. Importantly, this may lead credit unions to appear like privately or publicly held banks, but also to some differences. The key is that the underlying motivation is different. In banks, the motivation is profit. In credit unions, the motivation is the mutual benefit of the members.
Consider these business questions, and the criteria upon which the bank or credit union makes a decision.
| Question | Bank criteria | Credit union criteria |
|---|---|---|
| How should we deliver our services? | What will be the most profitable method? | What will provide the most net benefit to our members? |
| What should our growth strategy be? | What will be the most profitable? | What will benefit our members the most? |
| What is our marketing strategy? | What will produce the most profit? | What will our members benefit from? |
Conceivably, the strategy arising out of the question might be similar for banks and credit unions. For example, they might both find it beneficial or preferable to deliver services electronically, or expand into new markets, or sponsor an event center. But the underlying motivation is different. Banks: profit; credit unions: benefit to members.
Some key questions that usually elicit different responses between banks and credit unions are:
Ultimately, structure creates a great motivational gulf between banks and credit unions. As cooperatives, mutually owned for the benefit of members, credit unions seek the benefit of those who use the institution.
[1] Digest of American Income Tax Cases, prepared by Lyle T. Alverson, New York, Baker Voorhis & Company, 1921. Page 88. Page 102 of the pdf found here: https://archive.org/details/cu31924019978976/page/n101/mode/2up.
