By Kristen Christian

On the surface, community banks and credit unions may seem very similar. They both offer savings and checking accounts, loans, mortgages, online banking and bill payment, mobile banking, convenient ATM access and more.

The truth is, however, these two types of financial institutions couldn’t be more different. There are benefits and costs to both operations, and learning about the way credit unions work (and what sets them apart from banks) sheds some light on why Bank Transfer Day promotes credit unions as the best option for consumers.

How Do Community Banks Operate?

While many community banks operate with a focus on community investment and charity work, each is still a for-profit bank with the same fundamental structure as a corporate bank. A bank uses customer deposits to create profits by investing or loaning it out to other customers. When you make a deposit or buy a savings product, you’re essentially loaning money to the bank.

Bank customers have no ownership interest in the institution, because every bank is owned by investors (who may or may not be depositors), and banks operate to earn a profit for those investors. Banks are owned and controlled by stockholders, whose number of votes depend upon the number of shares owned. Customers don’t have voting rights in major decisions and have very limited control over how the bank is operated.

This can include a decision to sell a community bank to a corporate bank. Members of a bank’s board of directors are paid employees chosen by the stockholders, and do not necessarily reflect the diversity of their customer base. The Savings & Loan bailout in the 1980s and the more recent bank bailouts of 2008 used taxpayer dollars. Competition between banks prevents a sharing of resources, which means ATM access may be limited or even non-existent outside of your local community.

How Credit Unions are Different From Banks

Credit unions are not-for-profit financial co-operatives. Each credit union exists to serve its body of members and the community in which they live. When you deposit your money, you’re actually buying shares of the company. Rather than being just a customer, you’re a member-owner with a right to vote on major decisions affecting the credit union.

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