Occasionally lumped together, there are similarities, but also important, distinct differences
When consumers, borrowers, and businesses are frustrated with behemoth banks, they sometimes believe there is no other depository or lending institution to which they can turn in order to hold their savings or help their business (personal or professional). So, when clients are considering a change, what are some of their other choices?
They should explore a community bank or credit union.
As interest rates rise and clients shop for a financial institution in which they can better leverage their money, now could be the best time to explore the pros and cons of community banks and credit unions. Here, we will compare the two options.
What Is a Community Bank?
A community bank is comprised of members within a local or regional community, which is generally defined by the small geographical area that it serves. With a deep understanding of the community, these institutions tend to have strong relationships with the clients they serve. Community banks can be public or private—however, they are more likely to be privately owned and locally controlled to prioritize the long-term interests of local communities over the demands of capital markets. They have a for-profit tax status and accounts that lie within a community bank are FDIC insured. Meanwhile, the FDIC defines these banks as having less than $10 billion in assets.
According to Motley Fool, in 2020, community banks represented only 15% of the entire banking industry. Yet community banks granted 70% of all agricultural loans and 36% of small business loans.
What Is a Credit Union?
As member-owned, cooperative institutions, credit unions are not-for-profits that provide financial services to their members. Interestingly, members are not just clients—they are the owners who control the credit union while a volunteer board of directors manages the institution. Beyond that, credit unions serve set regions, communities or businesses (or a family member of a credit union member), so the level of customer service often reaches higher levels. As a not-for-profit, any profits made are “returned” to the members in the form of reduced fees, higher saving rates, and lower loan rates. The services offered are generally the exact same as those offered at community banks. Plus, accounts are NCUA insured, which, like FDIC insured accounts, protect up to $250,000 in combined accounts.
Pros of Community Banks and Credit Unions
Community banks and credit unions are often mentioned in the same context since both serve specific communities or segments of society and share certain similarities. Both offer popular banking services, such as savings/checking accounts and business/personal loans.
Both institutions aim to deliver a better banking experience than typical large banks by providing more client-centric services. Some consumers, borrowers, and businesses prefer working with credit unions and community banks since their staff tends to be “relationship bankers.” These bankers better understand their communities’ unique needs and, on an institutional level, commonly have less-structured underwriting for credit-related decisions than behemoth banks. This can make it easier for customers with low credit scores to gain approval. Beyond the above, both can offer:
- Better loan rates
- Lower fees
- Intrinsic appeal: each deposit represents an investment in your community or among your fellow members
- More service to underserved communities and demographics
Cons of Community Banks and Credit Unions
Although community banks and credit unions have similarities, they are different financial institutions, both from each other and from behemoth banks. While they offer several benefits, they also have a few cons, which may outweigh the pros for many clients who are accustomed to the convenience that behemoth banks offer. So, when it comes down to it, what are their negatives?
Community Bank Con:
- Can struggle to compete with behemoth or online banks on CD or savings rates
Credit Union Con:
- Membership is required along with the associated fee(s) and is limited
Community Bank and Credit Union Cons:
- Can offer fewer financial products and services than behemoth banks
- Can offer limited or less robust digital banking offerings than behemoth banks
- Can have limited branches and ATMs than the behemoth banks
Consumers Have Choices When It Comes to Their Banking Needs
Community banks and credit unions both have exclusive propositions that make them attractive to consumers. These institutions need to make themselves as customer service focused and agile as possible to keep their clients’ business. There is no need for a consumer to seek a loan or service from a big bank when their needs can be met by a local community bank or credit union. There are lots of options, but these institutions can meet their clients’ and potential clients’ needs with the help of a vendor like OpenClose to provide digital mortgage services that enable them to compete with much larger banks.