Credit Union

Updated on March 19, 2024
Article byAswathi Jayachandran
Edited byAswathi Jayachandran
Reviewed byDheeraj Vaidya, CFA, FRM

Credit Union Definition

Credit Unions are institutions based on foundations of not-for-profit, cooperative, and member-owned ideologies. They are owned by members, who are also the institution’s customers, functioning on the basic idea of lending amongst their members. These institutions provide similar financial services and products but differ from banks. 

What are Credit Unions?

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These institutions operate from the funds pooled by their members. Financial services are provided from this money and at lower costs. It works with the aim of community welfare, as its goal is not profit maximization. For the same reason, they provide better customer service than the traditional financial institutions in the market.

Key Takeaways

  • Credit unions are financial service-providing institutions. They perform similar functions as a bank but differ in several fundamental notions.
  • They are formed by members who identify and work together to achieve a common goal: the community’s welfare.
  • There are a variety of unions, and each is opened for different purposes, such as state employees’ credit union, federal navy credit union, digital federal credit union, Boeing employees’ credit union, etc.
  • The National Credit Union Administration (NUCA) administers and regulates the affairs of these unions.

Credit Union Explained

Credit unions are financial institutions with a nonprofit motive. The ownership structure of these unions nurtures long-term management that can focus on the customers’ needs. Since they serve in areas unreserved by traditional banking systems, they majorly contribute toward financial inclusion. They lend to low-income households and empower them.

These provide mortgages to buy a home, loans to purchase vehicles or capital funding for businesses. These unions open membership to individuals sharing a common bond; this could be an industry in which they work together or a community they are a part of, etc. 

There are different varieties of unions. Each one of them serves different purposes, such as state employees’ credit union (for community development) and federal navy credit union (for navy personnel), digital federal credit union (for lending purposes), Boeing employees’ credit union (for the welfare of Boeing employee community), etc. They are exempt from federal taxes, and some even receive subsidies from affiliated organizations.

These unions work on a three-tiered system. The U.S. Central Credit Union occupies the top tier as a wholesale credit union. It provided financial services and needed support to the corporate credit unions (CCUs). Natural person credit unions belong to the second (middle) tier and provide services to the CCUs. All three levels are under the control of the NUCA (National Credit Union Administration). It is the body that authorizes all federally chartered credit unions.

NUCA’s National Credit Union Share Insurance Fund (NCUSIF) ensures these institutions. The U.S. government backs it in “full faith.” The NCUSIF invests 1% of the union’s savings, uses it for its expenses, and rescues failing unions. In addition, the NCUSIF (National Credit Union Share Insurance Fund) insures member deposits. In addition, Some SSCUs (state-chartered credit unions) are insured by American Share Insurance (ASI). 

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Examples

Let’s check out some credit union examples to get a better idea:

Example #1

Dave wanted to be a shareholder of a financial institution. He took particular interest in a CU providing low-interest loans. Understanding that the institution was not about profits, he took particular interest in them and wanted to be a part of it. He, however, could not become a member as it was a new association created for the welfare of teachers. Unfortunately, he wasn’t one. This is one instance where the union did not accept outside people. But there are cases previously where the initial inclusive list expanded, such as the federal navy credit union.

Example #2

In 2008, a financial crisis hit the world—a time when most banks failed. However, the credit unions and other cooperative institutions withstood the situation. This was possible because profits did not drive them. As opposed to the shareholder-owned banks, these unions maintained good credit scores and focused on building their assets and customer base. Each member has a vote, and they are put to good use. They further invest the profit in other areas. The savings were recycled into loans, and any benefits accrued will go to the members only. 

Advantages

The basic foundation on which a union works is the financial well-being of its members. Some of its advantages are:

#1 – Interest Rates

These unions focus on providing loans at reasonable rates to their members. They have the liberty to pass the benefit to their members through an annual percentage yield on savings accounts and as an annual percentage rate on loans. Similarly, higher interest rates are possible on making deposits with the union.

#2 – Customer Satisfaction

They have access to ground-level data, and using the inputs can serve the community members better. In addition, they focus on this better than other financial institutions as their members are also their owners.

#3 – Benefit Small Businesses and Borrowers

They serve the underserved sections of areas where larger banks tend to ignore them. Since they have local knowledge, they do not hesitate to fund the small business owners who the large banks otherwise ignore. As nonprofit organizations, these focus on lending money to people through emergency loans. 

#4 – Community Empowerment

Many unions work with the notion of serving low-income communities. They connect with the local community to provide financial services at nominal interest rates regardless of the place. Saving substantial interest that would otherwise be incurred if borrowing from other institutions.

#5 – Diversity and Inclusion

They have in-depth reach within communities, know when people need more monetary benefits, and serve them accordingly. This brings financial assistance to the needy and empowers them into upliftment.

Credit Unions vs Banks

There are a few key differences between the two as listed below:

#1 – Membership

Any customer interested in a product or account can approach a bank, so long as the customer doesn’t have a poor financial history. Whereas unions are only accessible to members, individuals might not be able to join if household members do not reside in the community the association serves.

#2 – Availability of Services

Banks often have a larger network of branches and ATMs than these unions. Because there are branches and ATMs located all over the country, the convenience makes it simpler to get money from a bank. Despite the banks’ larger presence, the unions frequently work with other cooperatives to offer more branch locations and access to fee-free ATMs around the country.

#3 – Technological Edge

In terms of financial technology, banks frequently outperform unions. Banks and for-profit organizations have the resources to invest in ideas like mobile banking apps, which are becoming more and more crucial in a rapidly changing world. They have to do it to be competitive. While many unions have tried to boost their performance regarding offerings like mobile check deposits and banking apps, they don’t typically use cutting-edge technology as many banks do.

#4 – Range of Services

Even though credit unions and banks both provide many of the same products, banks are likely to provide a considerably greater range of choices. While business loans are a common component of bank products, not all unions provide them. As opposed to credit union cards, which typically have fewer benefits, credit cards supplied by banks are also likely to offer users more and more significant benefits.

#5 – Others

They vary in the structure; banks are for-profit, and these unions are not for profit. While banks need no memberships, these unions require membership to access financial services. The branch locations for a bank will be nationwide and typically local in the case of a union. However, both have insurance. It is provided by NCUA for CUs and by the Federal Deposit Insurance Corporation (FDIC) for banks.

Frequently Asked Questions (FAQs)

Are credit unions better than banks?

The answer depends upon individuals. If they want low-interest rates to help them be financially stable, the unions will be a better option. However, if the place an individual shift often or actively travels, in such cases, financial services will be provided by banks better.

Are credit unions FDIC insured?

The National Credit Union Share Insurance Fund insures deposits up to a minimum of $250,000 per individual depositor. It thus protects all savings at federally insured credit (FDIC) unions.

Why are credit unions better than banks?

They are considered better in some areas than banks because these unions are not for profit. Instead, they work for the community development and upliftment of community people by providing low-interest loans, high returns on deposits, etc.

Are credit unions nonprofit?

The unions are not made or carried out to create a profit. Instead, the small margin of profit they receive is reinvested into the cycle. Moreover, the subsidies and tax exemption they receive make it possible for them to remain a not-for-profit organization.

This article has been a guide to Credit Union and its definition. Here, we explain its advantages and compare it with banks, along with examples. You can learn more from the following articles –

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