Banks vs. Credit Unions: Financial Foes?
Turn on the radio. Pick up a newspaper. Have a glance at the many billboards dotting the metropolitan landscape. You'll be hard pressed not to find ads and editorials discussing the unique "war" between credit unions and banks. Both sides are carefully orchestrating strategic marketing initiatives to entice new and existing customers to engage with their products and services.
At this point in time, the market share of Minnesota banks and credit unions remains relatively unchanged. "Currently, banks hold 91.3 percent of the market share of deposits, and credit unions hold 8.7 percent," says Mark Cummins, president and chief executive officer at Minnesota Credit Union Network. "In fact, Minnesota credit union market share has remained relatively the same for the past 20 years."
"While individual credit unions grow, as a group we have remained steady in overall market share," says Pat Brekken, president of Richfield Bloomington Credit Union (RBCU) in Richfield. "The largest difference has been in the growth of large banks and the shrinking of community banks."
Down to Basics
At its most basic, the main difference between banks and credit unions is the ownership structure. Banks tend to be owned by a family or a group of stockholders and decisions are made in their interests. Credit unions are cooperatives owned by the entire membership, so decisions are made in the interests of members first, not the credit union's bottom line.
"Banks, I believe, try to maximize profits for their shareholders," Brekken says. "Profits of the bank are disbursed to the owners through dividends at year end. Credit unions try to maximize returns to their owners as well, which again are the entire membership, but do it in different ways. Maximizing returns may come in the form of lower loan rates, higher savings rates or lower fees. This is how credit unions pay back their member owners."
Joe Witt, president and chief executive officer of the Minnesota Bankers Association, says that one of the key differences between banks and credit unions is that credit unions do not pay state and federal corporate income taxes. "They tout lower fees and better rates, and sometimes they actually do offer those advantages," Witt says. "To the extent they do, it is because they do not pay income taxes." However, credit unions do pay property taxes, sales tax and employment taxes each year.
Historically, credit unions received their tax exemptions because they once served people of modest means. "[Credit unions] used to focus on serving low- and moderate-income people within a select group-the credit union's common bond," Witt says. "Many credit unions have changed their common bond from a single business or industry to a geographic area. Some now serve the 2.5 million people in the Twin Cities metro area, and one credit union serves anyone who lives or works in Minnesota or Wisconsin. Credit unions now actively sell to wealthy people. Despite the fact that they can no longer justify their tax exemption, they still have it."
More specifically, credit unions as financial cooperatives do not pay corporate income taxes. "Many community banks-I believe 67 percent in Minnesota-are Subchapter S organizations, which also pay no corporate income tax," Brekken says.
Focusing on Strengths
When it comes to the commercial lending arena, banks dominate due to regulatory limits placed on credit unions. Credit unions are currently limited to 12.25 percent of total assets in member business loans and $100,000 unsecured lines of credit to any one business.
Brekken has been very active in meeting with legislators to raise awareness on the need to increase the limit credit unions can lend to businesses. "One of the best things that could happen for Minnesota businesses would be to allow credit unions to increase these levels," Brekken says. "And credit unions are limited to 15 percent of capital as the largest amount they are able to lend to any one member, including businesses."
Brekken says credit unions have benefited more from the large bank challenges over the past years than smaller community banks have. "The things we most often hear is people are either fed up with the bailouts or the high fees and impersonal service of big banks," Brekken says. "Awareness of credit unions has spiked with the attention placed on searching for alternatives. This awareness has allowed credit unions to gain market share. In fact, RBCU saw 10.1 percent net member growth in 2011."
According to Cummins, consumers' discontent with banking fees over the past year has caused more and more credit unions to aggressively tout the fact that they have fewer and lower fees. This education is occurring on both a small and a large scale. "Some credit unions have done things as simple as developing a chart comparing bank and credit union fees and posting that information in their lobbies and on their websites," Cummins says. "Other credit unions have launched marketing campaigns highlighting credit unions' different approach to fees."
To counter, different banks have slightly different focuses. As Witt explains, some banks have focused heavily on small business customers, while others have expanded their trust departments. Some banks have kept a consumer focus, rather than a commercial one. "The key is for each bank to determine their strengths and play to those strengths," Witt says.
The economic situation is affecting credit unions in many ways. More loan losses over the past four years have impacted most credit unions. The interest rate environment is making it more difficult to make a profit just from margins.
"Many consumers are moving to credit unions as a way to save money on fees, thus increasing our deposit base and total assets, all of which impact the capital-to-asset ratio," Brekken says. "Growth strategies continue to revolve around consumer loan growth and real estate mortgage growth. Continued member growth is causing balance sheets to grow. This next year will hinge on credit unions' ability to grow our loan portfolios."
Witt stresses that consumers have lots of choices in the financial institution marketplace. "All consumers should weigh their choices and decide what is important to them," Witt says. "Some want convenience, electronic banking or trust services. With more than 400 banks in the state, consumers can find one that works for them."
So what does the immediate and long-term future hold for Minnesota banks and credit unions?
Cummins says that consumers' response to recent initiatives to educate the public about credit unions is mixed. "Most people like the idea of credit unions and support their business model," Cummins says. "However, due to direct deposit and auto bill pay, it is very difficult for people to untangle themselves from their current banking relationship. In my opinion, this is the main obstacle preventing people from making the switch from a bank to a credit union."
Minnesota credit unions have fared well through the economic downturn. At the end of the fourth quarter of 2011, the average capital ratio for Minnesota credit unions was 10.03 percent. "This number is well above the 7 percent required by regulators for credit unions to be considered ‘well capitalized'," Cummins says. "In addition, Minnesota credit unions' delinquency rates are about one-third of those reported by Minnesota banking institutions, and the full-year net charge-off rate is about 20 percent lower than the banking norm."
Going forward, both credit unions and banks are focusing on rebuilding their loan portfolios. Like the overall economy, the banks are showing signs of improvement. However, Witt says, the biggest issue they face is that there is very little loan demand. "Banks are working hard to identify the strategies that are best for them. They are looking to find the niche markets where they can succeed. Businesses and consumers are taking a conservative approach to borrowing," Witt says. "That has a significant impact on our banks, because loans are the banks' income-generating assets. The banks are incredibly liquid right now. They have tons of deposits, and they are just waiting for loan requests from qualified borrowers."
For credit unions, one key long-term strategy is focusing on financial literacy. The economic crisis showed that individuals do not know how to effectively manage their money. "This realization reaffirmed credit unions' commitment to financial literacy, which is something that they've been doing for decades," Cummins says. "In fact, in 2010 credit unions around the state provided more than 110,000 hours of formal and informal financial education to more than 37,600 consumers and members. In addition, credit unions presented financial lessons in nearly 500 high school classrooms around the state to nearly 6,000 students."
Minnesota Bankers Association also offers a tremendous number of financial literacy programs with its efforts focused on economic and community development and consumer and youth education. To learn more, visit minnbankers.com.