Thursday, November 12, 2009

The Fundamental Benefits of a Credit Union

A reader pointed out to me last week that I have never really spelled out what the big deal about credit unions is. I think I can break it down to three major points: Ownership, Mission and Service. I would like to say before diving into this topic that although all credit unions are charged with these same values, not all manage them with the same level of importance. When thinking about joining a credit union or when you evaluate your current credit union, understand that management has a significant impact on these values. You should get to know the manager of your local credit union, if they are aloof and inaccessible you may consider a different credit union. But I digress – on to the meat and potatoes!


Ownership of a credit union is the first fundamental difference between credit unions and banks. A bank is owned by shareholders. Ownership of many banks is literally traded on a major exchange such as NYSE or NASDAQ. Some banks are family owned, this means that one family or a group of families owncredit_union controlling interest of the bank and it is not publicly traded. Here’s the problem with this; I own stock and mutual funds, just like most of you, and I expect one thing from those investments - return. Rightfully so, I own it! I would have never invested in something that I wanted to break even. Why would an investor in a bank expect anything different? The problem is that the way a bank generates increasingly larger income each quarter (to avoid disappointing it’s owners), is by increasing fees or investing their own capital in higher risk investments – can you say mortgage backed securities?

Credit Unions are owned by the members. That is why we call them members and not customers! Every potential member has to meet the eligibility requirements to join, here at Gallup FCU that requirement is that our members must me Gallup employees or family members. There are many credit unions where the only qualification is that you live in a certain county or city. Either way you slice it, our members (customers) own the credit union. That means that there is no conflict of interest! Our owners expect return, so whatever we make in profit we fold back into the credit union in the form of new products, lower interest rates on loans and higher interest rates on deposits. We do not send out our profits to outside investors or other institutions. Big difference!

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“Not for profit, not for charity but for service.” All credit unions are charged with this mission. At a well run credit union these words are the core values behind every product and every employees actions. Credit unions are formed on the fundamental idea that banking should be based on community, in fact, that is how a credit union is run. A group of people pool their money together to be able to make loans to one another and benefit from the income generated from those loans.

I like to think of it in terms of the classic movie “It’s a Wonderful Life'”. George Bailey runs a Savings and Loan – which is different from a credit union but not too far of a stretch for this example. Do you remember the scene when there is a run on the savings and loan? I sure do, very distinctly – George yells above the noise (paraphrasing) “Now wait a minute! Your money is not here in the bank it’s in your house, it’s in Frank’s house and Ethel’s house…”

This is important because as times have changed, credit unions have not really gone away from that business model. Literally my deposit at the credit union could be used to fund an auto loan for my friend in accounting who is also a member. Now that is not to say that I don’t have access to my funds whenever I need them, the credit union is required to have enough money (called capitalization) on reserve to be able to handle all of your withdraws.

There is a certain level of ownership I feel being a member. At Gallup we call that engagement, I understand that my role as a member is important to the success of the credit union. I like the fact that when I put money in my savings account I am helping the credit union make a loan to another member. I also like the fact that when I need a loan, the interest I pay goes to all my fellow members in the form of interest paid on their savings accounts.

This is getting long but my favorite difference is coming up. Please keep reading!


I have said it before, what a difference it would make if there was less selling and more teaching in the banking world? A credit union is about the closest place that you will find teaching when it comes to consumer banking. Speaking from my personal experience, I do not take much satisfaction in pumping out 10 auto loans a day. Clearly the fact that I spend several hours a week writing this blog demonstrates how strongly we feel about education. But service is more than education, it is the culmination of all the parts I have been writing about today. As a member you are an owner and a credit union will treat you as such. As a member you are part of a community where your deposit and your loan matter. I don’t know about you, but I like to matter. I like to feel like my bank is working for me and that my deposit is significant, that is where credit unions succeed above the rest. Come experience the credit union difference.

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