September 15, 2023
Choosing a financial institution that will help you manage your money and get you where you want to be financially is a big decision. For most people, the two options are simple: a bank or a credit union. But what exactly is the difference and, more importantly, how does that difference affect your wallet?
Banks tend to market their services heavily, so many people use them because they’re more familiar with them. However, credit unions are also ready and willing to help you grow financially. In fact, working with a credit union may be more advantageous for its members and it’s primarily because of how credit union ownership differs from bank ownership.
Bank Ownership: the Shareholder Approach
Banks are privately owned, for-profit businesses that make money by handling money for others. They're governed by a board of directors —individuals who are typically appointed to establish policy, manage risk, allocate resources, and set bank goals. In turn, those directors often receive significant financial compensation in the form of cash and stock awards as well as other monetary perks like retainers and meeting attendance fees. The goal is to generate significant profits so that the bank will be able to pay out substantial dividends to its investors and shareholders. In order to do that, banks typically make money in a number of ways:
- Loan Interest: Banks receive deposits from their customers and pay those customers a small amount of interest for the privilege of holding their money. Banks also loan money, charging customers a more significant amount of interest than they pay on deposits. The difference between the interest made on loans and the interest paid on deposits is referred to as the spread or the money banks clear as profit.
- Interest on Securities: Until 2020, the Federal Reserve mandated that banks must keep a certain amount of their deposits on hand as primary reserves. Banks were then able to invest any excess reserves and use them to buy securities like bonds, for example, or finance additional lending. Legislation in 2020 discontinued reserve requirements, allowing banks more discretion and more opportunities to invest, lend, and earn profit.
- Fees: Beyond deposits and lending, banks perform any number of financial transactions and services for customers within the economy. However, they often charge customers specific fees for each of those services — monthly maintenance fees on checking or savings accounts, out-of-network ATM fees, excessive transactions fees, overdraft and insufficient funds fees, paper statement fees, wire transfer fees, dormancy fees, foreign transaction fees, card replacement fees, and even fees for closing an account are some examples.
The important thing is that people who use banks are customers. The only people who profit from dealing with the bank are the directors, investors, and shareholders.
Credit Union Ownership and Members
On the flip side, credit unions like La Capitol are nonprofit financial institutions. The focus is not on creating profit for shareholders or stockholders. Instead, as a nonprofit, credit unions reinvest any profit back into the credit union’s operation.
Credit unions are formed by groups of people with a common bond who contribute to and use the services of the credit union. Those individuals all have something in common through a specific group. They may live in a certain area, work for a certain employer, for example, or teach at or attend a certain school and are considered credit union members because they create the pool of resources needed for the credit union to function.
Banks serve any customer for a price, but credit unions exist to serve only their members.
The members own the credit union — not investors or stockholders — and members even choose who serves on the board of directors that governs the credit union. Members also often have input on policy changes or other issues that affect how the credit union does business or expands services.
Board members are often volunteers, but if they do receive a small stipend, it’s a nominal figure well below the compensation that those on a bank’s board of directors receive. Meanwhile, credit union board members tend to focus on educating both existing and potential members to increase their financial literacy.
Credit unions typically offer all of the standard services and transactions that banks do, and they reap the benefits in funds like banks do — through the interest charged on loans or the interest made on securities and fees. However, the figures involved in credit union financial transactions typically offer significant advantages over those of banks:
- Loan Interest: The dividends paid on deposits and savings are often higher than what banks offer. This often includes share certificates (similar to certificates of deposit at banks), money market accounts and individual retirement accounts, for example. Likewise, the interest percentage rates charged for mortgages, HELOCs, home equity loans, vehicle loans, and personal loans are often lower for credit union members than they are for bank customers.
- Securities Interest: Turning a profit through investments is a major focus for most banks because they pay dividends to shareholders, but credit unions must disclose all profits and reinvest them back into the credit union for the benefit of all members.
- Fees: Credit unions typically provide all of the financial services that banks do, but they do it for less. Fees are often lower than those for banks, and that can extend to everything from monthly service fees on accounts to mortgage closing costs. Requirements may be less stringent — lower minimum account balances, for example. Credit unions exist to serve their members — not simply profit from them. In fact, many credit unions instead offer perks to their members through extra services or favorable terms for transactions.
Members’ success is good for the credit union because when members do well financially, it improves the success of the credit union as well. Credit unions that perform well are able to offer more services and financial products on more advantageous terms, and their members can save money while making the important financial decisions essential to living their best lives.
Benefits of Credit Union Ownership and Membership
Credit unions share all the benefits of banking with their members without many of the profit-focused drawbacks of banks. For an individual, that can mean financial decisions are easier, less expensive, and maybe even more tailored to your individual circumstances without additional penalties or fees. To become a member of a credit union, you just need to be a part of the common bond and or geographical location.
With La Capitol Federal Credit Union, sharing in the common bond is as simple as living, working, worshiping or even going to school in the areas we serve throughout Louisiana.
If you meet that exceptionally wide criteria, all you have to do is open an account and you can enjoy the perks of credit union membership at La Cap. If you’d like to learn more, explore the benefits of our credit union online today!