Finance explained: What’s the difference between a bank and a credit union?
The market for banking is healthier than ever. So you may want to know – what’s the difference between a bank and a credit union? Australia has the Big 4 banks – Commonwealth Bank, ANZ, Westpac and NAB. But there are many smaller banks and credit unions to choose from, which all have their own benefits and drawbacks.
In this post, the team at Smallloans.com.au will tell you what makes banks and credit unions so different, and what that means when you’re looking for a place to park your savings or take out loan products.
Private vs. mutual benefit
The major difference between banks and credit unions are how the business is set up. The Big 4 banks that we mentioned earlier are public companies. That means they are listed on the Australian Securities Exchange (ASX) and people can buy and trade shares, or “pieces” of the bank. You don’t have to be a customer of the bank to buy their shares. The bank has an obligation to maximise their profits as much as possible, paying out dividends to their shareholders. Only shareholders have the right to choose the Board of Directors of a bank and vote at their official shareholder meetings such as an AGM.
Members vs. shareholders
Credit unions are not publicly listed on the ASX. Every customer in the credit union becomes a member. This means they own a piece of it and have a say in how the credit union is run. Each member can vote and choose the Board of Directors. Instead of focusing on making the biggest profit for their shareholders, credit unions often re-invest profits into better customer service, making their lending rates more competitive, lowering fees and focusing on community investment.
Are credit unions as safe as banks?
Yes. Credit unions have to jump through the same regulatory hoops like banks do. Credit unions, mutual banks and mutual building societies are Authorised Deposit Institutions. This means they must be licenced by the Australian Securities and Investment Commission to provide credit services and are overseen by the Australian Prudential Regulation Authority, the same as banks. Some credit unions follow the Customer Owned Banking Code of Practice that promises to put members first, among other things. Also note that balances up to $250,000 deposited in these licenced institutions were guaranteed by the Federal Government in 2012.
What are the upsides/downsides?
An edge credit unions have over banks is their attention to customer service and solid ties to a community. A credit union will bring together businesses and individuals from the community to enhance the wealth of everyone overall. Some credit unions are based around certain industries. For example, many state Police Associations and Teachers’ Unions have their own credit unions. Because profits are reinvested into the credit union, they may be able to beat out banks’ interest rates paid on deposits and provide lower fees than mainstream banks.
What credit unions struggle to provide
Credit unions operate with the cooperation of members. Unless the credit union is fairly large, they may not offer online banking services through your web browser or via a smartphone app. You may find it very difficult to find a credit union-owned ATM, and pay those annoying ATM fees all the time. If you want to borrow money to invest in property, shares or large projects that require substantial amounts of capital, a credit union may not be equipped to help.
If you are searching for a new bank, it might be worthwhile to check out what products credit unions can offer you too.