Credit unions and banks: there are still differences

Most of the public is unaware of the differences between banks and credit unions, but people who manage these financial institutions remain keenly aware of the legal intricacies that separate them.

Many of the differences between modern-day credit unions and banks can be traced back to the nation’s first credit union, Saint Mary’s Cooperative Credit Association – now St. Mary’s Bank — in Manchester.

The national credit union movement began when a local parish priest, Pierre Hevey, noticed that many members of his church were having difficulty procuring loans. A large number of church members were from Canada, spoke only French, and often lacked adequate collateral to qualify for a loan. Many parishioners were mill workers, and thus were not paid exorbitant wages — as little as 5 cents per hour — which added to their inability to procure loans from local banks.

Hevey, wanting his parishioners to take control over their own financial destiny, but also hoping they would not relinquish control after organizing the credit union, established rules unique to credit unions that are still in existence today.

First, in order to be a member of Saint Mary’s Cooperative Credit Association you had to be a member of the parish. This, however, did not automatically qualify you for a loan. Hevey believed, as did founders of earlier European and Canadian credit unions, that you should not be allowed to apply for a loan unless you first saved a certain amount of money within the credit union. The money would not only qualify you for membership but also would be used to fund loan demand for other parishioners.

The requirement of members to fund loan demand eliminated one of Hevey’s problems. He also had another issue, one less easily solved. Understanding that many banks in the country were then owned and controlled by a few wealthy investors, Hevey wished to avoid a similar situation from occurring in his fledgling credit union.

He avoided the potential problem by adopting a concept advocated by Alphonse DesJardin, the founder of the Canadian credit union movement. Every member of Saint Mary’s had one vote on crucial credit union matters, irrespective of the amount of money deposited. A member with a $100 savings account, better known as a share account in the credit union industry, would have as much voting rights as the member with a $10,000 balance, thus effectively preventing wealthier members from obtaining disproportionate control.

Profit v. non-profit

Just as Saint Mary’s credit union had membership restrictions, so do modern-day credit unions. While there are still some “parish” credit unions, credit unions are more often restricted by geography, occupation or company, thus generally making them much smaller than the average-sized bank. It is not unusual for a credit union charter to be limited to either a town or county. Other memberships are restricted to a certain occupation — teachers, for example — while some credit unions have a field of membership limited to the employees of a specific company or companies.

After all these years, members are still required to have a savings or share account, usually with a balance of $25 or more, in order to apply for a loan.

The board of directors assumes most of the managerial responsibilities of the credit union, just as it does with most banks. The difference, in many cases, is that the members of the credit union vote individual board members in or out, but only have one vote, unlike shareholders of publicly held banks, who have votes often equivalent to the number of shares they own.

Even though there continue to be many differences between banks and credit unions, there is none that causes more rancor than the fact that banks are for-profit financial institutions while credit unions are still classified as non-profit.

Banks maintain that this puts them at a competitive disadvantage because of their inability, unlike credit unions, to reinvest the taxed portion of their income back into their enterprise. The non-profit status of credit unions is particularly unfair, say the banks, because of the increased portfolio of credit union offerings now in comparison to thirty years ago, when few credit unions even offered home mortgages.

Credit unions counter the claim that they should be taxed by stating that they are much smaller entities with restricted membership opportunities, therefore limiting growth potential. Moreover, credit unions maintain that they are by charter restricted in the ways they can generate much needed cash.

A bank, they say, can go public and generate huge amounts of cash for special projects, loan growth or general growth initiatives, while credit unions are prohibited from doing so.

The issue of whether credit unions should be taxed has not gone away. Banks, at both the federal and state levels, have attempted to introduce legislation that would tax credit unions, but to date have been relatively unsuccessful. Credit unions, fully aware that another legislative onslaught will soon be coming, are gearing up for the next fight in Congress. It will be a battle fought at both the state and federal levels, and will serve as a reminder that there are still major differences between banks and credit unions.

John W. Zerillo is an associate professor and chair of the Business Department at Saint Joseph’s College of Maine.