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From charging double fees to opening unauthorized accounts, a recent investigation has revealed that Bank of America has engaged in illegal conduct for the last several years. The bank will settle the case for $250 million in fines and restitution.
This story illustrates the issues associated with the for-profit model in financial institutions. As a consumer, you should know that there are alternatives. After learning more about the differences between a bank and a credit union, you can decide which option is best.
Structure: Ownership and Governance
Who owns the major banks? Are credit unions member owned? One of the differences between a bank and a credit union is how their ownership determines how each financial institution operates and who makes critical decisions.
Banks are publicly traded corporations. With this model, investors can become shareholders by purchasing stock in a company.
Holding shares in a bank gives you the right to vote on important issues. The more shares a person or entity holds, the more votes and decision power they have. Shareholders also elect new members for the board of directors that oversee bank operations.
Because shareholders make decisions, the priority is often to increase the institution's value, for instance, by generating more profit through higher interest rates or expanding to new markets. This pressure to increase profits is only getting more intense as a combination of factors, domestically and around the world, cause margins to tighten.
Credit Union Structure
When you open a credit union account, you become a member and part-owner. As a member and owner, you get to vote on important decisions and elect members for the board of directors.
Credit unions don't have a presence on the stock market, which means the members' interests come first. The goal isn't to generate a profit; any gains benefit members through lower interest rates, less fees and higher deposit rates.
Services and Accessibility
While banks and credit unions have similar offerings their for-profit and not-for-profit natures dictate what products and services they prioritize.
In their quest for profit, banks actively expand the range of services they offer and prioritize the most lucrative products.
You'll typically find banking services like checking accounts, savings, loans, mortgages, credit cards, and investment accounts. These institutions also emphasize commercial banking services, with large corporations representing their primary source of revenue.
Banks are also very reliant on fee income. According to the Consumer Financial Protection Bureau (CFPB), banks made almost $8 billion dollars in 2022 charging their customers overdraft fees as high as $37 each.
Credit Union Services
Credit unions focus on their members. They develop product offerings that reflect the needs of the community. Thanks to the not-for-profit model, you can expect personalized products, lower fees, and attractive rates.
The products offered are similar to what you would expect from a large bank, with savings accounts, loans, credit cards, certificates of deposit, or business loans.
While major banks have had an advantage in digital banking in the past, credit unions are bridging the gap by actively adopting new technologies.
Credit unions operate smaller networks of branches and ATMs at the local level. The use of co-op branches allows these institutions to extend their outreach, and the regional focus means these branches are part of the fabric of the community.
Philosophy: Profit Motive and Community Focus
As a consumer, the products and services you choose matter. Choosing to bank with a big financial institution or a credit union impacts your community differently.
Banks operate to earn profits and support the interests of a group of shareholders. However, these interests don't always align with what is best for the customers or community.
Banks tend to charge higher interest rates and fees to boost profits. This quest for profit can go too far, and employees sometimes engage in unethical practices due to the pressure of meeting sales quotas. In 2020, Wells Fargo paid $3 billion after an investigation revealed the widespread practice of opening fake accounts to meet sales goals.
Not all banks engage in illegal practices, but their broader market reach makes it difficult to support the community. If a branch does well, the bank will usually funnel the money into investments or use it to expand to a different geographic area.
Credit Union Operations
Thanks to their local model, credit unions can directly support their members and community by making banking accessible and affordable.
Credit unions play an essential role in local economic development by teaching financial literacy or providing small business loan programs. They also offer grants and scholarships or sponsor local charitable organizations.
This sustainable model helps the credit union grow as local consumers and businesses build a sound financial future with the help of affordable and personalized banking products.
Credit Unions Offer Personalized Service, Community Support and Lower Fees
Several scandals have involved major banks over the past few years, revealing unethical practices that hurt customers while benefitting shareholders.
Not all banks engage in criminal activities, but the for-profit philosophy and publicly-traded structure don't always align with the interests of account holders.
As a consumer, joining a credit union that will redistribute profits through affordable banking services is in your best interest. Plus, you'll support the economic development and betterment of your community.
With almost 35,000 members, Power Financial Credit Union has proudly served South Florida since 1951. Joining our financial cooperative will give you access to various products, from personalized online banking to affordable loans.
Contact us to learn more about opening an account and becoming a member!