Credit Unions: A Primer

Last year I returned to Traverse City after an eight-year absence. Though heading back to a region I had once called home, I was going to work in an industry that was completely foreign to me. Or so I thought.

Formerly a senior analyst for a downstate community bank, I had received a good education in the realm of banking. I was excited to take that experience to the next level as an executive at a TC credit union. With the interview behind me, and the job offer made and accepted, it was time to learn the credit unions ropes.

After talking to credit union members and employees downstate, I was left wondering what exactly made credit unions different. Besides being a 'member' as opposed to a customer, what else was there? And how does that matter?

Here's what I learned: As a member of a credit union, you have more than just a deposit with your financial institution. You have a share. What does that mean? You own that piece of the business – in this case, the credit union. In short, membership equals ownership.

The 'member' versus 'customer' difference may seem trivial. However, a case can be made in favor of membership. In economics, there is a constant conundrum called the principal-agent problem. How do we get the agent (the person making the decisions) to act in the best interest of the principal (the owners)?

As you may have noticed, the group left out of this power struggle is the customer. As a shareholder, a credit union member takes the role of the principal (owner), and uses a representative volunteer board to keep the agents (the credit union management) in line. With this cooperative structure, a credit union is designed to serve its membership.

Volunteer Board

As I mentioned, a credit union's Board of Directors is chosen by the membership, from the membership, and serves without pay. These volunteer board members provide leadership and oversight for the credit union. Since there is no remuneration other than that received by a well-managed credit union, board members decisions are driven by the greater good rather than their own.

Cooperative Structure

Because a credit union is a cooperative, there must be a designated group (or segment) among which the credit union cooperates. In many cases this is a specific industry or company, but with increasing frequency, credit unions today are changing to a community charter. This means that if you are a member of the community, you can qualify for membership.

Safe Harbor

Though every credit union is different, most are perceived as safe and secure harbors for depositors. With no need to impress investors, profits can be moderate and, by association, so can risk. Credit union-retained earnings are moved to a capital (or reserve) fund and cannot be withdrawn except by loss in an upcoming period. In most cases, this creates a much stronger capital ratio than other financial institutions experience.

In addition, credit unions' shares (deposits) are fully backed by the National Credit Union Association (NCUA) up to $250,000. This is the exact same structure most people are accustomed to when depositing their money in commercial banks, which are backed to the same levels through the Federal Deposit Insurance Corporation (FDIC).

Supportive Network

Credit unions are part of a worldwide network, sharing ideas, information and resources – all for the benefit of the members. In many cases, a credit union is part of a vast network of other credit unions, which gives members the option to bank at affiliate branches throughout the country. Credit union partnerships also include ATM networks, ensuring that countless members have access to thousands of surcharge-free options nationally.

Competitive Rates

Credit unions are often thought to have better saving and lending rates. Nationally this might be true. However, never trust a national average to determine what is true in your market. A few phone calls to different financial institutions will give you a great education on what rates are in your particular area.

When determining the best fit for you and your finances, it is important to know all the options. If you have never considered a credit union before, perhaps next time you will. With a little investigation, like me, you might just discover credit unions are not as foreign as you once thought.

Willmott serves as Chief Financial Officer for TBA Credit Union.