Credit Unions vs. Banks: Understanding the Differences in the UK
Financial institutions play a central role in communities across the world, and the UK is no exception. Whether you need to finance your house, car, education, or travel, or store your income and pay your bills, banks and credit unions are the organisations you turn to.
They also affect a country’s economic growth by creating jobs and expanding economic activities, improving the quality of life of their members, supporting social projects like microcredits, and promoting sustainable development.
If you considering opening an account in a financial organisation, the UK has a plethora of banks and credit unions for you to choose from. However, with so many options, making the right choice can often be overwhelming. Which is better, and which one will suit your lifestyle more?
This article will cover what these financial institutions are, the difference between credit unions and banks, and their pros and cons so you can make a well-informed decision!
What is a Credit Union?
Credit unions are financial co-operatives that are owned and controlled by members. They provide members with loans, savings, and a range of other financial services. Credit unions are successful in about 105 countries, and studies show that 217 million people use them worldwide. In the UK, the first credit union was established in 19641, and they have grown to provide financial services to millions of citizens over the last 50 years.
Each member of a credit union contributes to a pool of funds, providing each other with credit at very low interest rates. Members can also elect volunteer directors using their vote, who are also a part of the membership.
Credit unions act as an alternative to traditional financial and banking institutions. Owned and handled by the members, credit unions do not have any external influence from investors or shareholders. They are focused on aiding the community, providing the best service to members, and offering loans at low interest rates, instead of maximising profit.
Credit unions are usually created by people living in the same area or working in a particular industry or company. They come in a variety of structures and sizes, and each caters to different requirements. Whether you want online banking, phone banking, a local branch or service, a payroll partnership, or a combination of these, there’s a credit union out there for you!
What is a Bank?
Banks are some of the most common and well-known financial institutions in the world—almost everyone has heard of and uses one. In the United Kingdom, a bank is a body corporate, partnership2, or business formed under British law. It provides a number of financial services, including safekeeping your money, providing loans, conducting payment services (like in-store and online spending via credit and debit cards, paying bills, and cash withdrawals), and more.3
In the UK, the PRA and FCA glossaries4 define a bank as a firm that accepts deposits and is a credit institution. However, they are not the same as credit unions.
The Difference Between Credit Unions and Banks
While they both provide important financial services and impact the community, they differ on many points. Some key differences5 included:
1. Profit and Not-for-Profit
Banks can be publicly traded or privately owned and are often focused on generating profit. Alternatively, credit unions are not-for-profit institutions owned by their members. Due to these distinctions, the two provide slightly different services and products.
2. Customers and Memberships
Credit unions tend to open their membership to people who share a common bond. This could be a common employer, industry, or area of residence (like a community, village, or town). Members have a say in electing their board members and can run for election themselves.
Banks, however, are controlled by investors and stockholders. Members’ voting on issues depends on the number of shares they own. Customers do not have voting rights, cannot be elected to board positions, or have a state in banking operations.
3. Customer Service
Credit unions are known for putting their customers first6 and providing superior customer service. Members receive personalised attention and service to meet their needs. Credit unions are also known for providing any financial education members may need. These services are not always provided by banks.
4. Loans and Savings
Credit union members can create savings accounts with large or small amounts, and these are pooled to create loans for all the members when needed. Loan applications are also made differently—at credit unions, the personal circumstances of the member are considered along with their credit score. The interest rate that is advertised is also the one fixed if the loan is approved. This is not always the case for banks.
The Pros and Cons of Credit Unions
Credit unions come with their own pros and cons. Some factors to consider include:
1. Pros
- Lower fees: Since they are not-for-profit organisations, their services have lower fees.
- Better savings: Studies show credit union members have better savings.
- Community service: They are more focused on community betterment and service.
2. Cons
- Restricted membership: To access services, you need to be a member. There are many requirements to become a member.7
The Pros and Cons of Banks
1. Pros
- Banking services: Banks provide a comprehensive range of payment options and online banking.
- Better safety: Banks typically have better safety and security precautions.
- Better access to services: Banks make access to credit and savings easier. Additionally, anyone can open an account with banks, as they have fewer restrictions on membership than credit unions.
2. Cons
- Profit-oriented: Since banks are for-profit organisations, their fees for services, as well as any interest rates are far higher. There is also less focus on community service.
- Lacks a customer-first approach: Banks are known to not be very customer-centric. Unlike credit unions, getting financial aid and customer support can be more difficult.
The Bottom Line
Whether you are an experienced veteran or a beginner in financial matters, deciding which financial institution to use can be confusing. This is especially true with the huge number of options present in the UK. For starters, find out what you want. Is customer service and support more important to you, or do you prefer the safety and security of banks?
Conducting thorough research and breaking the process into steps can help you make the best decision for you!
References
https://www.findyourcreditunion.co.uk/about-credit-unions/
https://www.handbook.fca.org.uk/handbook/glossary/G1206.html#:~:text=a%20bank%20which%20is%20a,part%20of%20the%20United%20Kingdom
https://www.bankofengland.co.uk/prudential-regulation/new-bank-start-up-unit/thinking-of-becoming-a-bank#:~:text=What%20is%20a%20bank?,plans%20fall%20within%20this%20definition
https://www.bankofengland.co.uk/prudential-regulation/new-bank-start-up-unit/thinking-of-becoming-a-bank#:~:text=What%20is%20a%20bank?,plans%20fall%20within%20this%20definition
https://abcfinance.co.uk/credit-unions-vs-banks/
https://www.creditunionsofwales.co.uk/difference_between_a_bank_and_a_credit_/
https://www.britannica.com/money/banks-vs-credit-unions
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