Pros and Cons of Banks and Credit Unions
Risk Your Money in a Bank?
Conventional wisdom says that a person needs a bank account, a credit card, an investment broker, a car, and a house to be successful. Society tends to measure one's contribution to it by what each person has or what that person can get for it. But do you really need a bank account?
Many people have at least one bank account. Most of the people that this author has talked to about their banking practices disclosed that they often pay a lot in fees for the privilege of having a bank account and receive little or no interest income in exchange for maintaining a balance in their account(s). Further discussion revealed that some of these people spend thousands each year in fees for their bank account. You should consider foregoing the conventional practice of having a personal bank account and establish an account at a credit union instead.
About Banks
Why should you prefer a credit union instead of a bank? This is mainly because of the differences in the profit status of the institutions types. Banks are “for profit” institutions. This means that management is always seeking a profit to return to the shareholders (and there is nothing wrong with that). Banks accomplish this by:
- charging high fees,
- offering most or all services for a fee,
- paying depositors a low interest rate on deposits, and
- charging its debtors a high rate of interest.
About Credit Unions
Credit unions are non-profit institutions. Credit unions tend to not seek a profit and desire to return as much value back to the depositors (which are often termed shareholders). Credit unions accomplish this by:
- keeping fees at a minimum,
- offering many services for free,
- paying a higher interest rate to their depositors, and
- charging their debtors a lower interest rate.
Historically
The banking oversight and regulatory agencies (for example, FDIC) have failed to keep the bank depositors’ monies safe. However, the federally insured credit union oversight and regulatory agencies (for example, NCUA) have succeeded in not losing a single dime of the depositors’ monies (NCUA, 2008).
Academically
The banking institutions tend to adhere to the economic agency theory. This theory posits that management will operate the banking institution with management’s own best interests in mind and the shareholders will usually benefit from management’s actions (Ross, 1973). The bank’s depositors will not benefit unless they are also owners of the bank. In contrast, credit unions tend to function in line with the stewardship theory. Stewardship theory proposes that an institution’s management will function in the best interests of the organization and, as a direct result of management’s caretaker philosophy, the organization will succeed, be more efficient, take less risks, and create greater value for its depositors/owners.
Ultimately, credit union depositors tend to pay less fees to the credit unions and earn higher interest on their deposits than they would with a bank. The end result is that credit union members save hundreds and earn even more by having their monies in a credit union instead of a bank.
References:
Mitnick, Barry. (1973). Fiduciary rationality and public policy. American Political Science Association.
National Credit Union Administration. (2008). Retrieved from http://www.ncua.gov/ShareInsurance/index.htm on September 25, 2008.
Ross, Stephen. (1973, May). The economic theory of agency. American Economic Review Proceedings.
Why give the banks this?
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