Understanding How Credit Unions Are Nonprofit Organizations

Are All Credit Unions Nonprofits?

Banks and credit unions have many similarities and a few distinct differences. Banks and credit unions offer many of the same services, such as checking and savings accounts for individuals and businesses, money market accounts, certificates of deposit, loans and financial services.

One of the main differences is that banks are owned by shareholders. Banks exist to serve their customers and to drive profitability for their shareholders. Credit unions are always nonprofit organizations because they are owned by their members.  A credit union’s structure is different from that of a bank and it’s also different from those of most other nonprofit organizations. Unlike other nonprofit organizations that are completely tax-exempt, credit unions do pay state, local, property and payroll taxes.

Governance for Credit Unions Differs From Governance for Banks

Because credit unions fall under the umbrella of nonprofit organizations, a credit union’s board of directors uses an approach to governance that more closely mirrors those of other nonprofit organizations.

As member-owned entities, credit unions don’t issue stock and don’t pay dividends. Any income that credit unions receive gets reinvested back into the organization. The goal of credit unions is to provide banking and other financial services to small groups of customers.

Credit union members vote for board directors annually at a designated election time. Members of credit unions can also have input on policy changes and participate in voting on many issues.

The board members of credit unions are typically volunteers. Larger credit unions may offer their board directors a small amount of compensation, but the amount is far less than what board members of banks typically receive.

Unlike the case with credit unions, profit drives banks. Board directors of banking and financial institutions need to focus on strategic planning so that they can please their shareholders, as well as their customers. Board directors of banks need to weigh the needs of their shareholders and those of their customers, which sometimes causes them to make unpopular decisions with those customers or shareholders. In order to please both constituencies, banks are more likely to have higher fees and to make more policies than credit unions.

Credit Unions Offer Favorable Benefits for Their Members

Many people tend to favor credit unions over big banks because they believe the benefits outweigh any negatives. Credit unions are usually able to offer lower fees for checking and savings accounts than banks. In addition, they sometimes offer slightly higher interest rates on financial deposits than banks.

Credit unions usually have some ability to offer loans on purchases like cars, homes and recreational vehicles. Some credit unions also offer uncollateralized personal loans in small amounts. Members of credit unions can often get lower interest rates on loans and mortgages, especially if they’ve been members of the credit union for a long time. Longevity as a member may also afford members a little more flexibility with getting approvals for loans.

Board directors of credit unions are usually invested in educating their members about financial issues. Credit union members may also be able to get other services like certificates of deposit, money market accounts and services for small businesses. Many credit union members enjoy some of the little extras that they receive as members, such as discounts on insurance products and on tickets to area attractions.

Members of credit unions that are affiliated with a school usually get the convenience of being able to visit a bank branch located right where they go to school.

Credit union employees are aware that the members usually have many choices for their banking needs and they’re usually willing to go the extra mile to be courteous and friendly toward customers. Credit union customers typically report that credit union employees are friendly and treat them well.

Who Is Eligible to Join a Credit Union?

With rare exceptions, credit unions require that their members share a common bond through their connection with a specific group.

Some employers sponsor credit unions for their employees. They may even allow extended family members to open accounts at their credit union. Other groups like schools, churches, labor unions and homeowner associations also sponsor credit unions. Some credit unions limit their membership to specific geographical areas and limit their brick-and-mortar facilities to within the same area.

Are There Any Cons to Using a Credit Union Instead of a Bank?

Credit unions are a good alternative to banks for many people, but they also have a few drawbacks that make them less desirable for others.

Because credit unions are typically small and limited to specific geographical areas, their branches and ATM locations are also limited to within a reasonable distance from the main credit union. Most credit unions now offer an online portal for their customers, which can make banking slightly easier when members are away from home. Smaller credit unions may not have the funds for technology like mobile apps. Some credit unions have formed a national credit-sharing program whereby members can make basic deposits and withdrawals from their bank accounts through other credit unions that also participate in the program.

Consumers who need a wide variety of bank services may not find what they need at a credit union. Credit unions don’t usually offer as many choices for rates on money market accounts and CDs. Credit unions with limited funds may refer their customers to brokers that don’t necessarily offer the best rates.

Fees can vary substantially between various credit unions, so it pays to shop around for the best rates and benefits. A credit union’s size may prohibit them from taking too many risks, so their criteria for approving loans and mortgages may be stricter than what customers can find at banks.

Credit Union Boards Follow Best Practices for Good Governance

Whether board members of credit unions are volunteers or they get paid, they have all of the same duties, responsibilities and liabilities as board members of any other nonprofit organization. They must know and follow all the local, state and federal laws that apply to credit unions and act in the best interests of the membership.

Board directors may also seek outside professional assistance as needed to guide them with their duties. Best practices require them to be fair and impartial in their business decisions and not unfairly discriminate against any members. Board directors of credit unions may defer operational functions to credit union managers, but they remain responsible for the oversight of the business. Credit union members elect board directors. They need to be careful to select board members who have a working knowledge of basic finance and accounting practices.