What Is the Main Difference Between a Bank and a Credit Union?
Discover the essential distinctions between banks and credit unions. Understand how their unique structures influence your financial options.
Banks and credit unions are both financial institutions that offer a range of services to help individuals manage their money. A bank typically operates as a business, providing various financial products and services. A credit union, on the other hand, functions as a member-owned financial cooperative.
Fundamental Operational Differences
A foundational difference between banks and credit unions lies in their ownership and profit motives. Banks are typically for-profit corporations, meaning they are owned by shareholders. Their primary objective is to maximize profits for these shareholders, which influences their operational strategies and financial offerings.
Credit unions, in contrast, are not-for-profit cooperatives owned by their members. Instead of generating profits for external shareholders, any surplus earnings are typically returned to the members. This structure means their primary goal is to provide financial services to their members at competitive rates and improve their financial well-being. This cooperative model means that members are both customers and owners.
Membership and Customer Focus
The way individuals engage with banks and credit unions also highlights a key distinction. Banks are generally open to anyone who meets their account opening requirements, and their focus is on attracting a broad customer base. They are accountable to their shareholders, which drives their decisions regarding product development and service delivery.
Credit unions require individuals to meet a specific “common bond” to become a member. This common bond can be based on where someone lives, works, or belongs to a particular organization or association. This membership structure means credit unions strictly focus on serving the financial needs of their member-owners. Each member typically has an equal vote in electing the volunteer board of directors, reinforcing the cooperative nature.
Financial Structure and Pricing
The differing profit motives of banks and credit unions directly impact their financial offerings, particularly interest rates and fees. Banks, needing to generate profits for shareholders, may set higher fees for services or offer lower interest rates on savings accounts. They aim to earn more from loans and investments than they pay out to depositors.
Credit unions, being not-for-profit, often return surplus earnings to members through more favorable terms. This can include lower interest rates on loans, higher interest rates (often called dividends) on savings accounts, and generally fewer or lower service fees.
Service Scope and Technology
The typical range of products and services, along with technological capabilities, also varies between these institutions. Banks often offer a broader array of specialized services, including complex investment products, large-scale commercial lending, and extensive wealth management options. Historically, they have maintained more extensive branch and ATM networks and invested heavily in advanced digital platforms.
Credit unions tend to focus on core consumer banking services like checking and savings accounts, mortgages, and auto loans. While they traditionally offered more personalized customer service, they are increasingly investing in digital technologies, including mobile banking and online tools. Many credit unions also leverage shared branching networks, allowing members to conduct transactions at participating credit unions nationwide.