Terms like bank and credit union are used interchangeably by most people these days. However, there are some distinct – and significant – differences between these types of financial institutions, including business purpose, ownership and governance.
We’ve summarized some of the key differences for you:
Banks are by far the most popular financial institutions. They come in all different shapes and sizes – some are nationwide institutions, while others are smaller, local organizations, like MidWestOne.
All banks are regulated and governed by a charter. The agency that charters the bank is primarily responsible for protecting the public from unsafe banking practices. It conducts on-site examinations to make sure the bank’s financial condition is good and that the bank is complying with banking laws.
Most banks are run by a group of investors who have a large amount of capital that helps fund the bank. As a result, the bank’s primary purpose is to make money for these investors and stock holders. The Board of Directors is hired, and paid, to make the majority of the decisions for the bank. Customers hold no voting privileges or decision-making power within the institution.
Anyone, in any city or state, can open an account with a bank, and because of this banks are generally more accessible nationwide. For example, if you have an account with a branch of MidWestOne in Iowa City, you can access that same account at branches and ATM’s in Davenport or other locations.
Banks are federally insured by the Federal Deposit Insurance Corporation, or FDIC. Since banks need a certain amount of deposits in order to meet their reserve requirements with the FDIC, they will often bump up their rates to attract people since every financial institution is required to keep a certain amount of money on deposit with the FDIC.
Banks also tend to have a larger variety of products and services that may allow you to centralize your banking needs versus having to keep track of accounts at several institutions.
Credit unions, on the other hand, are designed to serve a particular group or neighborhood. Because of that, people who use credit unions for their financial services are members of the credit union, rather than customers.
One of the biggest differences between banks and credit unions is that credit unions are non-profit organizations. As a result, the profits incurred by credit unions go back to the members after covering overhead costs. The non-profit status of credit unions means they also don’t contribute to federal corporate income taxes.
Also, credit unions are insured by the National Credit Union Administration, and are democratically controlled by the members. This means that members have more say in how the credit union is run, and hold decision-making power. Members elect a Board of Directors – rather than hiring one – who are chosen to fully represent the members in making decisions and upholding policies.