Tuesday 17th Jan, 2023
For over 100 years, Britain’s banking scene was dominated by giant banking corporations with well-known brand names and elaborate branches in most towns and cities. Recently, some new online banking firms (fintechs) have started to eat into the ‘big 5’ banks’ market share.
And then there are credit unions. In the last 20 years, what started as small community organisations, often hard to find, have become more prominent both on the High Street and online, attracted thousands of members, and are making a big social impact in areas they serve.
So, what are the differences between Credit unions and banks? What might persuade you to consider joining and using a credit union?
1. Credit Unions are owned by the people who use them
When you join a credit union, either to save or to borrow, or do both, you become one of its member-owners, with membership rights as set out in the rules. To join, you may have to live or work in the area it serves, but if you do it’s easy and free to join – online or in branch.
Usually anyone can open an account at a bank, but you are just another customer, with no real say in how the bank operates.
2. Credit Unions’ whole purpose is to serve their members
The purpose of a credit union is to serve its members, help them to be good with money and improve their financial well-being. It is not about making money out of those members.
Banks, on the other hand, exist to make money for their shareholders. Banks may target their products to certain types of customer that offer the best profit opportunity.
3. Credit Unions are not-for-profit
Being ‘not-for-profit’ enables a credit union to keep its loan interest charges as low as possible, because it only needs to cover its operating costs and pay a reasonable return to its savers. In any case, credit union loans have a legal interest rate cap (max. 42.6% APR).
Unlike banks, credit unions don’t have any external shareholders calling for big dividends and there are no bankers’ bonuses for their directors and managers.
4. Credit Unions are co-operatives and members have a say in how they operate
As members, the people who use credit unions play a big part in its success. They can attend the Annual Members’ Meeting (AGM), vote to elect the directors and make big decisions, and take part in member surveys. Member feedback has led to new savings and loan products being introduced to benefit members, such as our popular Christmas Saver and the Matched Loan.
At a bank, the customers have no real say in how it operates; the managers and shareholders make those decisions based on what is best for the bank.
5. Credit Unions have a different approach to lending
Credit unions only lend what they feel the member can afford to repay. Loans can be arranged from £100 up to £20,000. Flexible repayments – weekly, fortnightly, 4-weekly or monthly – can be matched to the day your income is received. Interest is not front-loaded but based on the reducing daily balance. Therefore, no penalties are charged if you wish to repay the loan early.
A free Members’ Death Benefit is available (limits apply) – one thing less for the member’s estate to deal with at a difficult time.
Banks don’t usually offer small personal loans, below say £2,000.
At a bank, there is often a fee to pay if you wish to settle a loan early.
Banks advertise low ‘headline’ rates on loans but that may only be offered to customers with excellent credit scores.
6. Credit Unions are passionate about helping members to build up savings
Credit unions are not just interested in lending. They promote and reward savings as a great way for people to build up resilience for a rainy day. Encouraging members to save alongside their loan repayments is a valued feature of their ethos. Members who do so may get a preferential interest deal. 70% of credit union borrowers continue saving after the loan is paid off.
Banks tend to promote saving and borrowing separately, rather than looking at the customer’s finances in a more holistic way.
7. Credit Unions are people-centred
At the credit union, there’s a big focus on ‘people helping people’, offering a personal touch and knowing about their members’ situation. Technology systems are used to help with administration but all loan applications are decided by a trained human underwriter.
When you call or email the credit union, your enquiry is dealt with by a person not a machine.
Banks may use credit scoring and automated decision-making for their lending, which could mean ‘the computer says no’.
As banks have many thousands of customers, contacting the bank by phone to make basic enquiries may not be very user friendly.
8. Credit Unions offer financial well-being support
One of the aims of credit unions is to ‘train and educate members of the community in the wise use of money, management of financial affairs and successful operation of a co-operative business’. They often have financial well-being information on their websites or in branch (budgeting tools, benefit maximisation, links to sources of support and helpful blogs with money tips).
Credit unions have designed services to help their members to save safely and borrow affordably. For example, they partner with employers to run workplace savings schemes, the proven best way to start a savings habit, even though this may not be a profit-generator.
A credit union will never offer a loan to worsen a member’s financial situation, or to earn commission or bonuses.
Banks tend to focus on the financial relationship with their customers and generation of income from transactional fees and add-on services.
9. Credit Unions keep funds within the local economy
After paying their running costs, any surplus that a credit union makes is either put to Reserves (to strengthen the business and develop better services) or returned to member-customers as a Dividend on their savings or loan interest rebate. It therefore benefits the local economy. Credit unions often aim to purchase their needs from local businesses and support local organisations and causes.
Any profit made by a bank usually goes as a Dividend to shareholders, who live anywhere in the country or even abroad. Purchasing decisions are made by the bank’s head office, so are unlikely to be targeted to areas where the customers live or work.
10. Credit Unions have volunteer directors
The directors of a credit union are usually volunteers, elected by and from the membership to a non-executive governance role. Enthusiasts for credit union aims and values, they contribute their skills and experience, give their time freely, and take part in training to help the credit union be ever more successful.
Directors of a bank are usually executives or non-executives appointed by shareholders to a paid role. They are not necessarily representative of the customers of the bank.
Banks and credit unions are both regulated by the Prudential Regulation Authority and the Financial Conduct Authority and deposits are protected by the Financial Services Compensation Scheme, so you can be sure that your money is safe with us.
We hope you found this explanation of the key differences between credit unions and banks interesting and it helps you to consider whether a credit union may be right for you.