Credit Union vs Bank - the Pros and Cons of Both Financial Institutions
If you bank with one of Canada’s Big Five banks, I’m guessing “What have you done for me lately?” is a question you’ve had cause to ponder frequently over the last few years. There’s no escaping the fact that traditional banks keep raising their fees even as they continue to deliver ho-hum service and next-to-nothing interest rates. That’s why a growing number of Canadians are looking at alternative banking solutions.
Despite this thirst for change, with Canada’s big banks dominating the country’s economic landscape, it can be difficult to fully grasp what other options are out there. Online banks (those without physical branches and that operate solely online, like Tangerine and EQ) offer attractive interest rates and low fees, but they’re not viable solutions for those who aren’t comfortable using a bank that can be accessed only via the internet.
Another option is to bank with a credit union. These financial institutions have existed in Canada for over a century and they function in much the same way traditional banks do. Credit unions offer a full range of services and products, including savings, chequing, TFSAs and retirement accounts, as well as credit cards, loans and investment guidance. There are, however, some significant differences between credit unions and banks that deserve careful consideration before you decide where you want to put your money.
The Difference Between Credit Unions and Banks
Profit vs. Non-Profit
When it comes to credit unions vs banks, one of the biggest differences is each entity’s primary mandate. In Canada, the Big Five traditional banks are profit driven. They are huge corporations that are listed on the Toronto stock exchange and thus must generate solid returns for stockholders and use their profits to increase their own corporate and economic power.
This profit-maximization approach is the antithesis of a credit union, which is a co-operative. A credit union’s mandate is to maximize the economic security of its members, as well as support the community (through donations and promoting small/medium businesses and community programs) in which it’s located.
The profit versus community debate brings us to another of the key differences between a credit union and a bank. As with most profit-driven, publicly traded businesses, a bank’s existence is centered around clients, board members and stockholders.
A credit union’s existence, however, revolves around its members. In general terms, to use a credit union you must first become a member by buying shares. Shares are very inexpensive (rarely costing more than $25 in total) and entitle you to part ownership. Everyone in the community who is a member has equal ownership and voting rights, and in this way all who use the credit union are invested in its management and success. All members can also vote for the volunteer board of directors. Members have a much more interactive relationship with credit unions than clients do with their banks.
We’re all familiar with the seemingly ever-increasing array of fees banks charge for everything from simple withdrawals to ordering cheques. With conventional banks, usually the only way to avoid being charged for transactions is to keep a large minimum balance in your account and/or pay a monthly fee.
With credit unions, many transactions are free and there is no monthly account fee or minimum deposit required. Credit unions also frequently offer more favourable interest rates on loans and mortgages. Notably, while banks charge you for using an ATM from a competing bank, many credit unions across the country (and in the US) are part of the EXCHANGE Network, which allows you to use affiliated ATMs for free.
Products and Services
Of course, in a credit union vs bank competition, an argument could be made that not all fees are bad. Conventional bank customers do have a wider range of products and services than those available to credit union customers. While many of the big banks offer a multi-tiered array of basic to premium chequing and savings accounts, credit unions may only offer one or two kinds of each account and have nowhere near the same variety of credit card options.
Because they aren’t major corporations, credit unions also have significantly fewer branches than traditional banks especially in rural areas, which can be a major drawback for those who like to visit a brick-and-mortar building to do their banking.
There’s no denying that banks trump credit unions when it comes to web presence. Credit unions don’t have the profits to invest in highly sophisticated and user-friendly websites. They also don’t possess the same social media savvy that major banks do, which means you often can’t reach out via Twitter or Facebook for customer service (which I usually find much more responsive and faster than phoning).
Additionally, major banks now offer apps to facilitate doing banking online with your mobile phone and are fully compatible with most e-wallets like Apple Pay and Google Pay. Many credit unions don’t have their own in-house financial apps and can’t yet be linked with increasingly popular payment apps.
Regulations and Insurance
Credit unions and banks are regulated differently. While banks are overseen by a federal authority, the Office of the Superintendent of Financial Institutions, most credit unions are regulated by the province in which they are located.
Deposits held in federally regulated financial institutions are covered up to $100,000 by the Canada Deposit Insurance Corporation. Deposits at credit unions are protected by different insurers depending on what province they’re in; nonetheless, all offer a minimum $100,000 deposit insurance.
It’s worth noting that when it comes to international travel, it makes little difference in terms of convenience and fees whether you travel with a debit or credit card from a big bank or a credit union. We’ve talked before about foreign transaction fees. It’s that extra 2.5% to 3% that most (but not all) credit and debit cards add to the cost of any purchase you make in a foreign currency. On average, banks and credit unions charge the same foreign transaction fee whether you use your credit or debit card to pay for something when travelling abroad. I say on average because some banks (and possibly some credit unions, though I don’t personally know of any) have some fancy, frill-laden (and quite costly) premium accounts that may waive the FX fee when using your debit card. Always speak to your bank, credit union or credit card company to get the exact details as to what FX charges you might incur abroad.
It’s pretty much the same story when it comes to making withdrawals at an ATM in a foreign country. Your bank or credit union charges a set fee (again, ask your financial institution for their specific fees) and the ATM company will also charge you a fee. Just as with traditional banks, it’s important to find out which international network your credit union debit card will work with. As long as it’s part of a network like PLUS, Cirrus or Maestro (which most are) you will likely have no problem using an ATM in most major cities. Interestingly, things are a little bit different when it comes to travel in the US. Some banks and credit unions (those that are part of the EXCHANGE network mentioned above) have agreements with ATM networks in the United States that will reduce or eliminate the ATM charge.
Remember that frustration we mentioned regarding rising bank fees and decreasing client care? Well, in credit union vs bank customer service satisfaction surveys across the country, credit unions reign supreme. In the Ipsos Financial Service Excellence Awards 2018 credit unions won the Customer Service Excellence award, surpassing all of Canada’s major financial institutions for the fourteenth year in a row.
Should You Choose a Credit Union or Bank?
While there are many differences between credit unions and banks, picking the right financial institution comes down to figuring out what services and products you need and whether you’re willing to pay fees. It may also mean pondering some abstract elements as well, like how much you want to feel valued by and engaged in your community.