What are the differences between credit unions and banks?
October 24, 2019
When it comes to the products and services they offer, Canadian credit unions are more similar to traditional banks than you might expect. Still, that’s not to say they’re entirely the same. Sure, you can go to either to open a chequing account, borrow money for a loan or mortgage, or even get a credit card. But in their basic structure and ownership, their level of customer involvement, even the rates and fees they offer on savings and investment products, credit unions and banks have several important and meaningful differences.
Here’s a point-by-point breakdown to help you better understand how credit unions are different from banks.
Banks are businesses that exist to make a profit: they make money off the money held as deposits, typically by loaning it out at a higher interest rate. In Canada, the big five banks are listed on the Toronto Stock Exchange and profits are directed back to shareholders, some of whom are investors only, not bank customers. Key decisions are made by a board of directors whose members are elected by the shareholders and get paid for their efforts.
In contrast, a credit union is a financial cooperative whose primary goal is not to generate profits, but to better serve its members, who are also the owners. If there are profits, they may be invested back into the credit union to improve services, shared among the members, or invested in the local community. No dividends are paid to outside shareholders who don’t belong to the cooperative. Board members are volunteers and are elected to their positions by fellow members.
Any Canadian with the appropriate identification can become a customer at one of Canada’s federally-regulated banks. No membership is required, and it doesn’t matter where in the country you live.
At credit unions, however, all incoming customers must become part of the cooperative by purchasing a membership, typically in the form of shares. This fee can range from $5 to $50, depending on the institution, and is a one-time charge. As shareholders, members receive annual dividends and have the right to vote on certain decisions impacting the credit union’s operations. Ownership and voting rights are equal among members, regardless of the amount of their deposits or investments.
Some credit unions cater to specific customer bases, such as people from certain professions (ie. farmers or teachers), ethnicities, or geographic locations. In some cases, it may be possible for existing members to refer family and friends. Credit unions tend to be more common in rural communities where bank services aren’t widely available. At provincially-regulated credit unions, all members must live in the province where the institution is regulated. Federally-regulated credit unions accept members from across Canada.
Safety and security
The Canada Deposit Insurance Corporation provides insurance for bank deposits up to $100,000. The same protections cover deposits at credit unions, but varying limits from province to province mean the total amount protected could be higher than at a bank. In Ontario, for example, provincial insurance protects the first $250,000 in deposits held at a credit union, while in British Columbia the protection amount is unlimited.
It’s important to note that any funds held inside a registered account, such as a Registered Retirement Savings Plan (RRSP) or Tax-Free Savings Account (TFSA) are 100 percent protected, no matter the amount.
Fees and interest rates
The big banks tend to charge fees for many of their services, whether it’s making a transaction or ordering a new chequebook. Some online-only banks offer fee-free banking, or low-fee banking. At credit unions, fees are often lower than at banks, and many services are free-free.
Interest rates on savings and investment accounts, as well as loans and mortgages, are often more favourable at credit unions than at the big banks. In other words, you’re likely to earn higher interest on deposits and pay lower interest on borrowing at a credit union, so check around for the best option before opening a new account or taking out a loan. Again, online-only banks may be more competitive than their brick-and-mortar cousins.
Products and services
Broadly speaking, banks and credit unions offer the same kinds of financial services, from chequing and savings accounts to loans and mortgages, to investment opportunities. However, banks tend to have a wider range of products to choose from, so customers with specific needs may find a better account or credit card option at a bank. At credit unions, there may only be one or two types of accounts to choose from, rather than a full tier of choices. Business customers in particular may find a better selection of options at banks, given their increased focus on commercial finance.
The customer experience
Both banks and credit unions operate branches, although banks tend to be more widespread while credit unions are generally more local. Both also offer access to a network of automated teller machines, or ATMs. Credit unions across Canada have teamed up to provide their customers with a nationwide network of more than 4,500 fee-free ATMs.
Both banks and credit unions offer access to online banking through websites and downloadable apps for smartphones and mobile devices. Credit unions, however, may not offer the same access to some e-wallet apps, such as Apple Pay and Google Pay.
Finally, if customer service is important to you, you might prefer the small, locally-focused approach of a credit union. In 2018, market-research firm Ipsos gave Canadian credit unions its Customer Service Excellence Award for the 14th consecutive year.