How Do Credit Unions and Banks Differ?
It is hard to walk far in any major city without seeing a bank branch. The Big 5 - TD, CIBC, RBC, Scotiabank, and BMO - are omnipresent in Canadian day-to-day life. They have formed an oligopoly where most consumers would only ever think of performing standard banking tasks with them.
Saving and borrowing money requires a ton of trust, and Canadians have demonstrated time and time again that they have a lot of faith in these Big 5 banks. But, what many don’t realize is that there are alternatives, and these alternatives can be better than big banks in several regards. Credit unions are a different sort of financial organization that is present all over Canada but are not as widely used. By the end of 2016, Canada only had 320 credit unions (also known as ''caisses populaires'' in Quebec). Deposits with credit unions are insured just like any other bank deposit, but there are many differences between traditional banks and credit unions.
The Key Difference
The one difference with credit unions that dictates all the other factors is that they are non-for-profit organizations. Where big commercial banks are devoted to making more money for their shareholders and paying those profits out as dividends, credit unions only have to pay employees. The “owners” of a credit union are actually the customers. To use a credit union, you pay for a credit union membership and this gives you voting rights and all the normal rights of a shareholder.
Credit unions have very different business models for this reason. As they are no longer aiming to maximize profits (since all their customers are also their owners), the focus is on using a corporate entity to maximize the utility delivered to all customers. The utility is the observed metric, rather than profits, and this helps the community and the costs each person pays.
Where Credit Unions Shine
Credit unions are generally favourably viewed by customers because of their low fees. Banks are profit-creating machines, and the only way to do this is by charging massive fees to customers. For any of the big banks, they are making a profit by charging the highest interest on loans they can to borrowers while paying the lowest interest rates to lenders.
When you become a credit union member, you are likely to receive a much higher interest rate on the money in your chequing account, because of this lack of profit-taking. This alone is enough to attract a lot of new customers, but then they see the differential in borrowing rates, and credit unions become extremely tempting.
Why So Many Stick with the Big Banks
All of what you read above may sound wonderful, but there is a reason not everyone in Canada uses credit unions. The main one would be convenience. Banks can afford to do things like having ATMs, bank branches, and provide a wide range of services because they pay well. Without the profits that would result from taking higher fees and offering some of the more profitable services, very little of that is possible.
Additionally, the technological aspect of credit unions is still quite muted. These non-profits end up being run on a bare bones budget because the technology isn’t seen as vital to providing the service to credit union members. This means that credit unions often don’t offer services like online banking and credit cards that can be used abroad. Couple this with the fact that most credit unions are designed to be targeted towards only a certain segment (usually geographic), and they can quickly become more of a headache than they are worth.
Cost and Convenience
Looking at the advantages and disadvantages listed above, they all seem to come down to a trade-off between cost and convenience. As a shareholder in the credit union, you are being given a way better rate or price than you would receive at a regular bank. But you also need to travel further to get that money and don’t have the ability to manage it and transfer it as easily as you would at a big bank.
Your financial position and lifestyle will dictate your decision here. If you want to travel all over the country and world and need to have constant access to your funds, then a credit union is not for you. However, if you are looking to save your money in one place for a long time, and don't need to be constantly checking it, then you will save a lot of money going the credit union route.
The final advantage of a credit union is the customer service is generally much better. If you have ever experienced poor customer service at a bank, then you can appreciate how this could make your life much easier and remove the stress of banking and dealing with your financial situation.
Making the Right Choice
In the end, the key is to realize that none of this is black-and-white. There are strengths and weaknesses to both, and it will really just depend on your financial position and needs in terms of financial services.
Two things you should remember while making your choice is that not all credit unions (or banks, for that matter) are the same, and you can always use both services at the same time. There is no reason you can’t get the best of both worlds, but you will also need to do your research on any prospective credit union since you won't have the same amount of public opinion and ratings to refer to as you would with banks. Both way, knowing you have options is a very helpful mindset to have, and considering a good local credit union can be of great help to your personal and business finances.