You've probably read it somewhere -- credit unions are better than banks. That's what Consumer Reports, Bankrate.com, and Money magazine say. Credit unions are owned by members. They are not for profit. They pay higher interest rates on checking accounts, savings accounts and CDs. They charge lower interest rates on credit cards, car loans and home loans. They also charge lower fees for overdrafts and late payments. They have more friendly customer service. Credit Unions have NCUA insurance just like FDIC insurance for bank deposits. What's not to like them? It begs for a question:
If credit unions are better than banks, why don't more people use them?
According to Monthly Credit Union Estimates (pdf, pp 9-10) by the Credit Union National Association, credit unions' market share is much smaller than banks'. For the purpose of market share comparison, I'm counting savings and loans -- think Washington Mutual and ING Direct -- as banks.
| Credit Unions | Banks | |
| Household Savings | 10% | 73% |
| Non-Revolving Consumer Loans | 13% | 33% |
I don't have a good answer to this question of why the credit unions' market share is so small if the conventional wisdom is that they are better than banks. I'm hoping you can help me figure out. I have a few hypothesis in no particular order. First I will share why I'm not using a credit union myself.
1. Banks have better products. The Fidelity mySmart Cash account I'm using is technically not a bank account. The underlying services are provided by three banks -- Fifth Third for depositing the balance, PNC for debit card processing and UMB Bank for checks and ACH. I have yet to see a credit union offering anything that matches Fidelity mySmart Cash although some of the new reward checking offers come close. My credit cards are also issued by banks, not credit unions. These cards offer better rewards. My mortgage was also funded and serviced by a bank, although this is perhaps where credit unions are most competitive. If I ever refinance again, I will probably get it from a credit union. My car loan is through a manufacturer's finance company. It's neither a bank nor a credit union.
2. Banks market themselves better. Banks have larger marketing budgets. They advertise on TV, radio, billboards, in newspapers and magazines, and online. More marketing brings more customers. You would think customers choose their banks by the services they get and by the prices they pay, not by who advertises more, but maybe some fall for advertising.
3. Banks have more outlets. Banks have more branches and more ATMs. They are on street corners and in grocery stores. More outlets mean more convenience for their customers. In the world of direct deposits, debit cards, online bill payment, and cash back from grocery stores, I wonder if the benefit of more outlets is more perceived than real. Many credit unions also participate in the CO-OP Network which offers 25,000 surcharge-free ATMs nationwide. Even if one has to pay a few bucks for getting cash once in a while, the customers may still be better off with a credit union. Perhaps customers prefer to do their banking face to face.
4. People don't know they can join a credit union. This goes with #2 about marketing. In the past you have to be an employee of certain employers or you have to be a member of an association of some kind in order to join a credit union. Nowadays there are many community based credit unions. As long as you live in certain counties, you can join many credit unions in the area. There's even a FindACreditUnion.com which lets you search for a credit union by your address. I put in my info and I got a list of at least 15 different credit unions around me. I'm pretty sure most people can join a credit union if they really want to.
5. Banks are better than credit unions after everything is taken into consideration. Banks and credit unions compete for deposits and loans. Customers are looking out to their own best interests. After everything is taken into consideration, more people still chose banks. Sure people complain about banks ripping them off by giving them very little interest for their savings and charging them high fees for overdrafts, but after all is said and done, people voted for banks with their wallets. Maybe, just maybe, the conventional wisdom is wrong and banks are actually better after all?
Now it's your turn. Do you use a credit union for your checking account, savings account, CD, credit card, car loan, or home loan? If not, why not? If you already use a credit union, why do you think more people don't use one?
9 comments:
#2, #3, and #4 are valid and add up. Convenience is a big thing for people. When there's a BoA or Wachovia on every corner that is significant. I think people also perceive security in size.
I would add that inertia is always an underrated force. People tend to stick with what they know and what they are familiar with. Most people just don't like change. Many people are also lazy. Its not easy to change banks.
I've gone back and forth with CUs and large banks for 20 years. I use which ever works best for me. My current mortgage is with a CU, my checking and HELOC are with a bank.
I think its a false conclusion to say one is better than the other. Sometimes one is better at some things. Otherwise they both wouldn't exist. Lord knows banks have tried their best to squash CUs, so obviously CUs do something right.
My guesses: Image, location, marketing and inertia.
Traditionally, CU were organised around big businesses or trade unions, and these days working is to passe, who wants to be seen inside a Credit Union? What with the working people?
In my area, most CUs are located around urban areas, when they start opening branches in the 'burbs, they'll compete with banks for a larger customer base.
Banks nowadays are killing each other proving how advanced their products are. At a dinner party? your bank is still available on your cell phone!
Finally inertia: my wife had worked for banks, we always got free accounts, checks... One day I'll get around to exploring a local CU, one day.
My credit union is fine, nothing special. It's interest rates are decent but not great. Mortgage rates are worse than average.
Here's my take on why people shun CUs:
1) People are mobile. CUs are generally regional. I can be pretty sure Wells Fargo will be available everywhere in the US. Not so for First Tech CU.
2) Who cares about interest on a checking account? Honestly, this is one of the stupidest reasons to pick a bank. Let's say you get 2% on your checking account. If your average balance is $1000, that's $20 over the course of a year. That's chump change, even in the context of other chump change.
3) CUs are relatively unknown. Everyone heard of Bank Of America, and Wells Fargo. But who's heard of People First Credit Union? And when people think about their money's safety, size and name recognition matter.
it took me a while to realize that charles schwab had the most value. i'm reluctant to believe people actually vote with their pocketbooks. unless you're obsessed with finance and accounting like i am, you probably settle on "good enough" without even knowing what's possible.
My guess is that big banks refrain from taking their customer's money just up to the point that they don't run them off. They do this through advertising (my bank's name is on the local stadium, yipee!) and fluffy programs like keep-the-change.
I just left Wachovia for a regional credit union two months ago. Wachovia began charging a $3.99/month PFM fee for downloading account activity into my personal finance software. They also duplicated ATM fees from non-Wachovia ATMs. Neither of these fees are uncommon, but why would you pay it when you don't have to? Think about this, soulless corporate banks have one objective - to maximize profit. While you aim to save your money, they aim to separate you from it as often as possible without running you off.
On the other hand, credit unions are non-profit organizations that are owned BY the account holders. Mine assesses absolutely no fees whatsoever. Sure, I may pay a fee to the ATM when I withdrawal from a non co-op machine, but my credit union doesn't duplicate that fee, and I prefer to just get cash-back (if I need cash) when I make a purchase. Additionally, they offer 5% on checking and savings, (Wachovia offered 0% on checking, and 0.05% of savings), and offer lower rates than big banks on loans, mortgages, and LOCs.
For me, it was a no-brainer.
findacreditunion only works for about 60% of the states. Is there one that works for all of them?
Fortunately, I "bank" with USAA, which I believe is a credit union. But I'd love to also have a local "bank" account, for stock power forms, a safe deposit box, and the like.
Anon - NCUA also has a Find a Credit Union search form you can use. USAA is not a credit union. It's a savings and loan, like Washington Mutual, which most people think as a bank.
I have been with my credit union for years and years. I am happy with them. No fees, higher CD rates and it seems like they look out for me. BUT after moving to a different state, I find that it is difficult to stay true to my CU without sacrificing convenience (no CU locations in new state I've moved to, and have to find co-op CU to make deposits). So with my hands tied, I had to open account with a bank for ease of use.
Since I moved to the US from Canada 7 yrs ago, I've only used one "bank" and it's the First Tech CU, then I use Fidelity for investments and 401K. I never thought I'd go to a CU when I was in Canada, it had seemed like why would I use a wig if i still have hair on the head. Anyway, I have to say I've been very happy with my CU. It has a reasonable savings rate of 2.667%. Free money orders. Deposit box. Yes it's true the ATM's are sparse compared to the banks, but I live in the 'burb so they are still very accessible. Although no cashback, their visa is comparable to most. Same 1% int'l fee. I like most their stress-free auto-credit card payment from my checking, then i do my audits once in a while. But after reading this blog and the reader comments, I'm interested to check out the Fidelity mySmart and Charles Schwab, just to keep my options open. Last point before I forget, their human service is excellent, very personal, and I never have to feel like I need to prep for battle with heartless bankers to ask for anything I need.
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