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I was listening to the radio the other day on my way home from work and heard an advertisement for a bank, then a few seconds later I heard and advertisement for a local credit union. Then I drove by a bank and then I passed a credit union. I had been mulling over switching some of my accounts from my current back to a locally owned credit union. I decided I should read up on the difference between the two as it had been awhile since my Money and Banking class back in school. You are the lucky beneficiary of my research.

Banks

First, lets define a bank. Most us know or think we know what a bank is. According to Wikipedia "A bank is a business that provides banking services for profit." Thanks for the circular definition, Wikipedia. To define a bank we need to define banking.

Banking is best defined as the business of taking deposits and then lending out those deposits at a profit. That is a huge simplification but its the core of the banking business. Banks take deposits in the form of checking accounts, savings accounts and certificates of deposit (CD). Banks then make loans in the form of mortgages, automobile loans, and personal loans. This is the traditional form of banking. Some of the most well know banks are Citibank, Bank of America and Wells Fargo.

Banking has not changed very much over the years. Recent innovations include online banking and the inclusion of some investment services. Overall though the banking business has remained the same for many years.

Banks are traditionally very profitable institutions. This has led to a negative view of the banking industry by many. Banks are heavily regulated, partly because of the publics perception of the banking industries role in the Great Depression. Since the 30's banks have been heavily regulated with some progress towards loosening restrictions in the late 90's. Banks can now engage in investment activities and the late 90's and early 00's saw a large increase in bank and investment firm mergers.

Credit Unions

Credit Unions originally emerged in Europe, spread to Canada and then the US. Credit Unions arose out of the need for people who wouldn't normally get loans from a bank to borrow money.

Credit Unions are bank-like entities that are owned by its members. Credit Unions can either be non-profit or for-profit depending on their organization. Credit Unions typically cater to distinct populations based on religion, employer, occupation or geographical area. Credit Unions have a mission to help its members prosper financially. Because the members are owners, they may expect a higher level of service.

Credit Unions usually aim to provide higher interest rates on interest bearing accounts and lower interest rates on loans. They can do this because of their not for profit nature. Because there are no stockholders to please the credit union can keep its profits and the members receive the benefits.

Having friends who work in banking and at credit unions has given me some insight into the difference. I worked in the banking industry for 7 years so I also have some personal experience with banking. Banks have become very sales oriented.

Gone are the days of a banker in a three piece suit waiting in his office for customers to stroll in and request a loan. Bankers have aggressive sales goals and concentrate on getting high revenue products into the hands of customers. In fact one of my banker friends told me that they now sell "widgets" and it doesn't matter if it's a $1 million commercial loan or a consumer credit card, they just "need to sell x number of widgets every month to hit their goals." Recent earnings results of the major banks have shown that these efforts have been very successful.

While talking to a friend who was a loan officer at a credit union, the difference between banks and credit unions became quite obvious. The credit unions are almost like the banks of old. There is very low pressure to "make the sale." Instead there is a lot of emphasis on member service. My friend who we will call Steve said, "We're basically told to keep it very low pressure. Don't push the member into anything. The tellers will refer the member to us if they need something. Otherwise we just try to get them into the best product possible." Of course compensation for credit union employees also tends to be lower because of the lack of sales emphasis.

Head to Head

So know you know the differences in philosophy and mission between banks and credit unions. But how do they compare where it really matters, that is what kind of rates can they offer the consumer?

To answer this question I took a survey of local credit union and bank sites to determine their interest rates for various products. This is something you can easily do as most financial institutions publish their rates online.

Here is a small comparison of rates.

	New Car 36 Month Loan	1 Yr CD
Credit Union
1	6.25	4.06
2	5.75	4.08
3	5.75	4.1
Average	5.92	4.08
Banks
1	5.99	2.37
2	6.99	4.93
3	8.75	2.09
Average	7.24	3.13

These rates were taken from the financial institutions' web sites. As you can see the credit unions advertise significantly lower rates on loans and higher rates on certificates of deposits (share certificates for credit unions). Of course we are only sampling 3 banks and 3 credit unions. Most of the rates came from nationwide banks. Most regional or local banks did not list their rates or if they did the page that was supposed to list the rates was unavailable.

A note on the websites of these financial institutions. The web sites of the credit unions were generally very good, meaning they worked. Of course the web sites of most national banks worked very well also and rates were easy to find. Most regional banks web sites are/were pretty bad. I got more than a few 404 errors. There is something about a company that can't maintain a decent website that makes me wonder how well they can handle my money.

Most of the small banks web sites are bad for the same reason. They all used prepackaged sites that come with the software they use to manage their bank. How do I know? I used to work for one of those software companies. The small bank software interfaces with the online banking software. But there is just a bare minimum of functionality and customization that goes into those sites. That's why so many small bank sites look so darn awful. Many small banks just don't have the resources to maintain a fully functional website.

Back to our credit union discussion. Most credit union sites were easy to navigate, looked good, and had the information on rates in an easily accessible location. They were very open about what the rates would be for each credit tier.

So as a credit union customer you can expect lower rates on loans and higher rates on interest bearing accounts according to the publicly accessible information on both the bank and credit union web sites. If you're shopping for rates, this makes the decision very easy. However you should still shop around as all banks and credit unions won't follow this trend.

The last thing I was concerned with is ATM access. I get all my cash from an ATM and the fees associated with using an ATM outside your network can be horrendous. The decision will depend on your ATM usage. Do you travel a lot and need ready access to cash? If so, a nation wide bank may save you a lot of money on ATM fees simply by having ATM's around the country. However, if you rarely travel or pay for everything with a debit or credit card, which is increasingly more common, the ATM dilemma, may not impact you as much. For instance you could withdraw a large sum of cash before your trip to avoid using ATMs outside your network. Also you could try to pay for travel expenses with a debit or credit card.

I employee the latter strategy when I travel. We usually get a large amount of cash and then pay with a credit card when possible to get the rewards. Any cash we have left over we simply deposit or use for day to day expenses. I'm not one of these people who is afraid to carry cash. I just separate the cash into smaller sums and stash some in a money belt, some in my carry on, in my luggage, etc so that I won't loose all of it if I'm mugged.

Conclusion

I think that the average consumer is better off with a credit union. This is of course my educated opinion, backed up with advertised rates and personal opinions of friends still inside both institutions. What do I use myself? I'm still a bank customer for now. I have been shopping around for a credit union in the local area that has good online access. I know I won't use a small bank as their online service just isn't up to par.

I'm looking for a credit union that has several locations and easily accessible ATM locations around town. When I find one I will post about my experience.

*Photo Credit: http://flickr.com/photos/33622680@N00/60154060/

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