credit unions

Credit unions' rise likely to continue

Leonard ArviIn recent years, consumers have directed a lot of ire at the nation's banks. The financial crisis exposed the dangerous lending practices of many of these businesses.

When scores of banks were deemed "too big to fail" and granted taxpayer-funded bailouts, fed-up consumers began to look for an alternative place to keep checking and savings accounts.

Enter credit unions. These nonprofit institutions are growing fast, thanks to their customer-friendly ways, says Leonard Arvi, assistant professor of finance at the Franklin P. Perdue School of Business at Salisbury University in Maryland.

Arvi believes this trend will continue, and explains why in the following interview.

How did credit unions come about?

Credit unions were originally created to promote savings (and) to serve those in rural areas who lacked access to financial institutions. In the mid-19th century, rural communities were not served by the banks like they did in the larger towns or cities. It was to fill this void (that) credit unions were created. Even in the present day, credit unions serve those populations who lack access to a regular bank in many developing countries.

Over the years, credit unions have evolved from providing social capital to the underserved or unbanked communities to (a) niche player attracting deposits from savers who want (an) alternative to large commercial banks.

As of 2011, in 100 countries there are 51,013 credit unions with 196,498,738 members with assets totaling $1.563 trillion. The largest credit union in the U.S. is Navy Federal Credit Union, serving 3.4 million Department of Defense employees and their families with $45 billion in assets.

How are credit unions different from banks?

Credit unions are not-for-profit, tax-exempt organizations. They are called cooperatives in some countries (and) are owned by those who invest and save in these institutions. For example, when you open a savings account in a credit union, you can give ownership share proportionally to what you save in the organization. They are more community-oriented, offering competitive rates to their members, as they are not profit-driven like commercial banks.

Members elect the board of directors with one vote per member irrespective of how many shares they hold. Publicly traded banks have voting rights proportional to share ownership. So credit union members have greater say in how the credit union is run than a typical shareholder of a commercial bank.

"Not profit-driven" does not mean they do not make any profits. They have to make money on their loans and investments, with which they can pay out shareholders' dividends, as well as for the operational expenses for running the credit unions. Expenses include paying salaries for employees, buildings, equipment and other necessary infrastructure costs.

Unlike banks, credit unions do not have (to) meet quarterly earnings expectations of Wall Street, so they generally tend to be conservative in their investments and less risky than "too big to fail" financial institutions that offer banking services.

As they are not profit-driven, they can provide loans -- auto, home, equity lines of credit -- (at) a rate that is lower than what a larger financial institution might charge a customer.

Credit unions exist primarily to serve (their) members with competitive interest rates and serving the underserved -- those who do not have access to formal banking.

What are the advantages for consumers of choosing a credit union over a bank?

Credit unions invariably offer higher interest rates on different savings accounts (money market, certificates of deposit, etc.). They also charge lower interest rates on different consumer loans such as mortgages, auto loans, and (home) equity lines of credit than larger banks.

Credit unions usually serve a particular community, so they usually charge less in fees than comparable banks. Fees include account maintenance, overdraft and other banking service fees.

This does not mean credit unions do not charge overdraft fees -- they do, like banks, but members can easily negotiate for lowering the fees due to the personal banking relationship and ease of access. Besides, members generally can avoid the charges by linking their checking and savings account so any shortfall in checking is automatically withdrawn from the savings account.

Since credit unions (take) pride in their service, they tend to be more inclusive and work with their members when such fees are imposed.

Like banks, all deposits by the members in credit unions are federally insured up to $250,000 for each account.

What are some of the potential downsides of banking at a credit union?

For consumers who like to have all their financial needs met at a single institution, credit unions might not be able to offer all the possible services. For example, many but not all credit unions offer retirement planning, college savings accounts and individual retirement accounts.

Also, for businesses that need sophisticated needs such as foreign exchange services, risk management or hedging services, credit unions might (not) be able to offer these services.

Otherwise, for all day-to-day banking services, credit unions do a great job for most consumers and meet their banking needs.

What's behind the brisk growth of credit unions in the last few years? Is it being driven by a backlash against banks?

Since the Great Recession, credit unions have actively courted savers by offering free checking or no-fee banking services. The disgruntled public, who were looking for alternatives to larger national or regional banks, have embraced credit unions for their competitive rates and lower fees.

Their tax-exempt status has made them more attractive and has helped improve their bottom line. All these benefits flow back to the members in the form of dividends or lower fees and interest rates.

Expect more growth of credit unions as they offer mobile banking and other consumer attractive features as they increase their market share. (The) public wins when they have choices, easy access and more robust competition in the banking industry.

We would like to thank Leonard Arvi, assistant professor of finance at the Franklin P. Perdue School of Business at Salisbury University in Maryland, for his insights. Claes Bell, senior banking analyst/writer for Bankrate.com, contributed the questions for this interview.

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