Banks and Credit Unions

So, just what IS a bank? What is a credit union? How do they differ?” I ask these questions of my students each semester and invariably, a lot of them don’t really know the answers or why it matters. Here’s the thing: these are institutions that are fundamental to our financial lives and, next to anything you do in terms of daily habits and activities, have the most immediate impact on the trajectory of where we’re going as a community. I’ve discussed some of this earlier in “The Business of Money”, but it bears further discussion.

In short, easy terms, banks are for-profit institutions in which you can keep your money safe (it’s insured up to $250,000) and carry out various financial transactions such as: shoring up savings, paying bills, getting a loan, and perhaps start building credit with a secure credit card.

Credit unions, by contrast, are non-profit institutions in which you can keep your money safe (it’s insured up to $250,000) and carry out various financial transactions such as: shoring up savings, paying bills, getting a loan, and perhaps start building credit with a secure credit card.

Wait… what? Let’s walk through this one. Banks are for-profit companies, whereas credit unions are non-profit membership-based organizations. As far as the individual customer is concerned, they pretty much offer the same set of services and either can do a fine job of meeting a family’s basic financial services needs. So if they do the same thing, why am I bringing this up? Because the differences make all the difference in this personal and collective journey we’ve embarked upon.

Banks, as companies, are generally owned by shareholders. So when profit is made from you – the customer – in the form of fees, penalties, interest from a loan you took out, or interest off money you’ve put into your account that they then lend to someone else (returning a teeny fraction of that interest to you as payment, while they keep a larger portion), that profit generally goes to the shareholders and basically gets consolidated there at the top. This may be an oversimplification, but you get the gist of it.
Credit unions on the other hand, are membership organizations. You, the individual are not a customer, but a member of the club. The concept is that everyone in the club pools their money together and then they can have their own financial institution. As with any good club, there are rules determining who can be a member. (Not Calvin and Hobbes’ G.R.O.S.S. Get Rid Of Slimy girlS variety of membership criteria!) Some will be based upon your employer, such as the one my grandfather was a part of. Governments, large universities, and other anchor institutions may have their own credit unions. Others are more geographically based: anyone who lives, works, worships, or goes to school in a given area can be a member. While the whole membership criteria is baked into the legal design of the credit union, they really want as many people to join as they can get. So being a relative of a member can get you in, or as I’ve seen, even donating to a commonly supported charity can gain you entré. The point is, they believe in – and rely upon – the strength of the collective.

Credit unions will make their profit the same way as banks, off fees and interest. However, there are important caveats with this: 1) the punitive fees at a credit union are generally much lower and fewer in number, 2) the rates of interest earned by you on a savings account are usually higher, and 3) whereas the profits at a bank are siphoned off to the shareholders, at a credit union, the profits are directed back to you and me as members, often resulting in additional money coming to us (called ”dividends”). It’s the difference between extracting wealth and reinvesting it in the community, at its most basic. Not only does this arrangement result in technical differences, but it also impacts the culture of the institution. There’s less motivation to rack up huge numbers in short-term growth, and instead to focus on long-term member satisfaction. The fees are designed to cover operating costs, not serve as one of innumerable profit generating mechanisms. If you’re interested in finding a credit union near you, visit https://yourmoneyfurther.com/ or ask around at work or in the community.

Now, as I mentioned earlier in the book, we shouldn’t label all credit unions as saintly and banks as evil. Both have their roles and can do an incredible amount of good for the community. We need to have critical discernment to see where a financial institution’s interests lay. Do they play nice on the playground? An example of this is often seen in the role community banks (which are smaller and more culturally rooted in the community) undertake to aid both the individual and commercial financial needs in the locale.

In Baltimore, there is a great little cafe that serves as a neighborhood hub for Black community life. And I’m not just talking about a place where people come to meet each other – these folks take it to a whole new level: Hosting weekly free organic food give-aways, periodically turning over the kitchen to budding entrepreneurs who are trying to get their own food service cottage industries off the ground, organizing annual trips to South Africa, providing space for local artists and authors to share their works. People come daily for their dose of community (and coffee and amazing food). A friend of mine who lives in this neighborhood of predominantly African American professionals noted that if Wakanda were a real place, this cafe would be it. But to get such a place off the ground requires capital, and as mentioned earlier, coming by capital to build businesses or invest in real estate (either for personal or professional use) by African Americans has been traditionally difficult and expensive, due to racist practices of redlining. One of the owners of the cafe is pretty big in the local social entrepreneurship scene and was giving a talk I attended, in which they gave a big loving shout-out of gratitude to their bank. My gut reaction was: who gives that type of love for their bank? But as I thought more about it, I saw the important connections. The Harbor Bank of Maryland, unlike the big, wealth extracting banks, is a community bank that is dedicated to a higher calling. It’s a Black owned enterprise, and holds or operates charters for specifically investing in and developing the local community. And in this case, they recognized the importance of this cafe’s presence in the community and made the financing come together.

It’s these kinds of relationships that financial institutions should have with the people they serve. Some are more inclined to engage in business this way, due to their organizational structures. At the end of the day, it’s usually safer to keep your money in a bank than under your mattress. But when you’ve got options, look for those institutions that share your values of well-being for all.

This book is a work in progress and we’ll all benefit from your input and collaboration. In the “Leave a Reply” below, please post examples, comments, questions, and needed edits. By posting, you grant permission for inclusion of any content to become part of the book, now or in the future, in whatever form it may take. I’ll give attributions to the extent possible. I know sharing about our financial lives can be sensitive, so if you want to share anonymously, please use the contact form instead and I’ll honor your request.

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