Credit Unions VS Banks

Business owners seeking out a great financial institution might be curious about the similarities and differences between banks versus credit unions.

Both offer important services like savings and checking accounts, loans, and credit cards. Beyond the surface, however, how they operate plays a crucial role in the financial health of persons and small businesses alike.

Read on to learn about banks and credit unions, the pros and cons of each, and how to pick the best one for your small business.

What Are Banks?

A bank is a financial institution that accepts deposits, gives out loans, and provides financial services to its customers. The best banks for small businesses aren’t just places to stash your cash – they’re essential institutions that play a vital role in our economy and daily lives.

The ownership of banks varies depending on the type of bank in question. Generally, the banks we interact with on a day-to-day basis are owned by stockholders and bank holding companies (BHC for short). Central banks, such as the Federal Reserve, are owned by the government.

Banks have been around for centuries — the first known banks date back to ancient Babylon, Greece, and Rome. And much like banks today, these ancient banks facilitated trade through accepted economic mediums (e.g., gold, wheat, livestock, and similar commodities) and earned profits by levying interest onto loans.

The Business Model Of Banks

Banks primarily make money through the interest they charge on loans and the fees they collect for various services.

When you deposit money into a bank, they use those funds to offer loans to other customers or to make investments. The types and kinds of investments vary, but in general, banks will invest in real estate, stocks and bonds, and government securities.

The difference between the interest charged on loans and the interest paid to depositors is called the net interest margin, which is a key source of income for banks.

Different Types Of Banks

Not all banks are created equal. There’s a diverse range of banks out there, each catering to different needs and preferences.

Here are a few common types of banks:

• Retail Banks: Also known as consumer banks, these are the banks most of us interact with on a daily basis. They provide services like checking and savings accounts, loans, and credit cards to individuals and small businesses.
• Commercial Banks: These banks primarily serve large corporations and businesses, offering services like corporate loans, asset management, and investment banking.
• Investment Banks: As the name suggests, investment banks specialize in helping companies and governments raise capital through various financial instruments, such as stocks and bonds.
• Central Banks: These are the big players that oversee the country’s monetary policy, control the money supply, and ensure the stability of the financial system.

How Are Banks Regulated?

Since banks play such a critical role in our economy, it’s essential to have a system of checks and balances in place (no pun intended). That’s where regulatory bodies come in.

In the United States, for instance, banks are supervised by several agencies, including the Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC).

These organizations work together to ensure banks operate safely and soundly, protecting both the financial system and everyday consumers, such as businesses and individual citizens.

What Are Credit Unions?

Unlike banks, credit unions are not-for-profit financial institutions. And instead of being owned by stockholders or private individuals, credit unions are owned and operated by their members.

Credit unions provide many of the same services as banks, such as savings and checking accounts, loans, and credit cards. It’s possible to get business funding through credit unions.

The first credit union was established in rural Germany in the mid-19th century. Its founder proposed that community members could enjoy a better quality of life if they collectively pooled funds, making loans and similar forms of financial assistance available to those who would not otherwise be able to access them. The concept quickly spread to other countries, and the credit union movement took off in North America in the early 20th century.

How Do Credit Unions Operate?

Since credit unions are member-owned and not-for-profit, their main focus is to serve their members rather than maximize profits. Credit unions return their earnings to their members in the form of lower fees, better interest rates on deposits, and more competitive loan rates.

Members of credit unions typically live in the same geographical area, work for the same employer, or have family members who are already enrolled in their services. The Navy Federal Credit Union, for example, requires members to be enlisted in the United States Armed Forces or have some demonstrable affiliation with them, such as being a civilian employee.

Different Types Of Credit Unions

Similar to banks, there’s also a variety of credit unions, each catering to different member groups and offering a range of services.

Here are some types of credit unions you may be eligible to join:

• Community Credit Unions: These credit unions serve members who live, work, or worship (as with a faith-based credit union) in a specific geographic area, making them accessible to a broader community.
• Employer-Based Credit Unions: As the name suggests, these credit unions are sponsored by an employer, serving its employees and their families.
• Military Credit Unions: These credit unions cater to members of the military and their families, providing tailored financial services to meet their unique needs.
• Educational Credit Unions: These credit unions serve members who are affiliated with educational institutions, such as teachers, students, and alumni.

How Are Credit Unions Regulated?

Just like banks, credit unions are regulated to ensure they operate safely and responsibly.

Credit unions are supervised by the National Credit Union Administration (NCUA) in the United States. This is a federal agency that oversees and insures the deposits of federally chartered credit unions.

Additionally, state-chartered credit unions are regulated by their respective state’s financial regulatory agency. These regulatory bodies work together to protect credit union members and maintain the stability of the financial system.

Similarities Between Banks & Credit Unions

Both credit unions and banks are viable options for managing your finances. Let’s take a look at a few of their similarities.

Services Offered

Banks and credit unions provide many of the same financial services, ensuring that customers have access to the tools they need to manage their money. Some common services include:

• Savings & Checking Accounts: Both banks and credit unions offer various types of deposit accounts like checking accounts and savings accounts to help customers save, manage, and access their money with ease.
• Loans & Credit Cards: Whether you’re looking to buy a property, finance a vehicle, or get a business credit card, both banks and credit unions have lending options to fit your needs.
• Online & Mobile Banking: With technology at the forefront of financial services, both banks and credit unions have embraced online and mobile banking platforms to help customers manage their accounts wherever and whenever they need.
• ATMs & Branch Networks: Access to cash and in-person services is crucial for many consumers. Banks and credit unions both provide ATM and branch networks to ensure members can access their money and receive personal assistance when needed.

Regulation & Deposit Insurance

Both banks and credit unions operate under regulatory oversight to ensure the safety and soundness of the financial system.

Banks are regulated by entities such as the Office of the Comptroller of the Currency (OCC), the Federal Reserve, and the Federal Deposit Insurance Corporation (FDIC).

Credit unions, on the other hand, are regulated by the National Credit Union Administration (NCUA) and state regulatory agencies.

Additionally, deposit insurance is provided for both banks and credit unions. The FDIC insures bank deposits up to $250,000 per depositor. Similarly, the NCUA also provides the same level of coverage for credit union members.

Competitive Rates & Fees

Both banks and credit unions strive to offer competitive rates to attract and retain customers. Credit unions generally have fewer fees than banks, however, which is partly what makes their services attractive.

While credit unions are often known for providing better rates and lower fees due to their not-for-profit status, many banks also work to stay competitive in this area.

After all, banks stand to gain from deposits and loans just as much as the individuals and business owners who are their customers.

Differences Between Banks &Credit Unions

Despite their similarities, banks and credit unions have a few important differences that could make you choose one over the other. Let’s go over them.

Ownership & Purpose

One of the main differences between banks and credit unions lies in their ownership structure and purpose.

Banks are for-profit entities owned by shareholders — naturally, then, their focus is on generating and sustaining profits. If you’re shocked by the interest rate you got on a recent loan, understand that this is the bank protecting its own interests.

Credit unions, on the other hand, are not-for-profit organizations owned by their members. Their goal is to provide benefits to their members with the capital they acquire through deposits.

Membership Requirements

Because credit unions typically have membership requirements, the services they provide won’t be accessible to everyone who wants to be a member. If there’s a credit union that’s caught your eye, check to see if you’re eligible first.

Banks generally have no membership restrictions, so their services are available to a wider consumer base.

Rates & Fees

Credit unions often offer better rates on savings accounts and loans in addition to lower fees for various services.

Banks, being profit-driven, may have higher rates and fees, although they can still be competitive in certain areas. For instance, because their profits often grant them access to more resources, banks are in a better position to approve larger loans and lines of credit.

How To Choose Between A Bank And A Credit Union

Whether a bank or a credit union is a better fit for you comes down to what you prioritize and how their features align with your personal or business needs. These are factors you ought to keep in mind as you shop around:

• Services & Products: Assess the types of accounts, loans, and other financial products offered by each to determine which best meets your needs.
• Rates & Fees: To find the best value for your money, compare interest rates, account fees, and other charges between banks and credit unions whose services you want to enroll in.
• Accessibility & Convenience: Research the availability of branches, ATMs, online and mobile banking options, and customer service — ideally, what you choose aligns with your lifestyle.
• Membership Requirements: A bank’s lax membership requirements could make it a better choice for you if you don’t meet the eligibility criteria for joining a credit union.

Pros & Cons Of Banks

Pros & Cons Of Credit Unions

Is A Bank Or A Credit Union Better For Your Business?

While banks and credit unions are similar, certain features or perks may make one stand out to you more than the other. With this information, you can make an informed decision about which type of financial institution is the best fit for you.

When To Choose A Bank

When To Choose A Credit Union

If a credit union is what stands out, we’ve compiled a guide to credit union loans for small businesses to help you get the funding your business needs to succeed.