Credit Union vs. Bank: 4 major differences

June 8, 2015 by The Motley Fool

If you’ve ever wondered about the difference between a credit union and a bank, then rest assured that you’re in good company. Because these two types of financial services companies do largely the same things — that is, take deposits and make loans — their differences aren’t immediately apparent. Let’s go over four of the biggest distinguishing characteristics between the two.

1. Ownership
Since the deregulatory movement gained momentum in the mid-1980s, legislators and regulators have gone a long way toward harmonizing the types of products that depository institutions — namely, banks, thrifts (otherwise known as savings and loans), and credit unions — can offer to their customers. Prior to that, credit unions and thrifts focused on various types of consumer credit, while banks zeroed in on commercial lending. But nowadays, these differences are more muted, as credit unions and thrifts have gained the ability to offer a broader assortment of credit-related products.

One major difference that hasn’t changed, however, is the ownership structure. Banks are corporations owned by shareholders, who, in turn, have voting rights commiserate with the number and type of shares that they own. By contrast, credit unions are owned by their customers — their “members.” Each member, regardless of how much money he or she has on deposit, gets one vote in electing board members. Furthermore, while board members of banks are typically paid for their service, people on a credit union’s board volunteer their time.

2. Profits
Banks and credit unions view their ultimate business objectives differently. Banks are in business to make money for their shareholders. They do so by taking a small sliver of capital, leveraging it up by a factor of roughly 10 to 1 or more, and then using the net proceeds from their assets to cover expenses, pay taxes, and, most importantly, distribute to shareholders via dividends and share buybacks.

Credit unions, by contrast, are nonprofit entities. Yes, they borrow money from depositors, and then invest the funds into loans and other types of income-generating assets. However, instead of distributing the net proceeds to their owners, they use the earnings to increase interest rates on their members’ deposits, and to decrease the rates on loans made to members.