Credit Union vs Bank: Similarities, Differences, And Knowing Which To Choose
Don't know if you should use a bank or a credit union? Use this guide to determine which is the better fit for your small business banking.
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.
Table of Contents
What Are Banks?
In simple terms, a bank is a financial institution that accepts deposits, gives out loans, and provides financial services to its customers. Banks 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.
Pros And Cons Of Banks
- Broader Range Of Products And Services
- Larger Branch And ATM Networks
- Technological Advancements
- Higher Fees
- Lower Interest Rates On Deposits
- Less Personalized Customer Service
- Not Always Advantageous For People With Poor Credit
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.
Pros And Cons Of Credit Unions
- Lower fees
- Higher interest rates on deposits
- Personalized customer service
- Better access to funding
- Limited product and service offerings
- Smaller branches and ATM networks
- Membership eligibility requirements
Similarities Between Banks And 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.
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 And Checking Accounts: Both banks and credit unions offer various types of deposit accounts to help customers save, manage, and access their money with ease.
- Loans And 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 And 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 And 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 And 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 And 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 And 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 And 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.
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 And 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 And Products: Assess the types of accounts, loans, and other financial products offered by each to determine which best meets your needs.
- Rates And 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 And 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.
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:
- Opt for a bank if you prioritize a wider range of products
- If you need extensive branch and ATM networks
- If you need better access to financial technology
When To Choose A Credit Union:
- Opt for a credit union if you need lower fees and better interest rates
- If you would like a community-forward approach to financial assistance and management
Trying to find a bank that will help fund your business?