(Editor’s Note: You can find the CNN Money article, “Credit Unions’ Homey Image Starts To Fray.” In the interview below, The Financial Brand complains about media outlets who try to paint the retail banking industry with too broad a brush, which — somewhat ironically — is pretty much what ended up happening in the CNN Money article. )
Every time banks screw up, the press inevitably turns their attention (albeit briefly) to credit unions. Banks are popular villains in the media, and credit unions serve as the protagonist in their narratives — e.g., headlines like “Tired of Big Banks? Consider a Credit Union.” This love/hate cycle plays out whenever banks bring negative attention on themselves, which has been quite often lately.
Banks and credit unions have largely been mythologized by the media. The story that reporters like to tell is this: “Banks are big, bad, mean and greedy. Credit unions are small, sweet, personal and generous.” This is an oversimplification, but it’s about all the American public really can handle, so you can’t completely blame journalists. The spirit of the mainstream media articles published today seems to be, “Walk into any credit union and you’ll be better off than you would be at a bank.” But it’s very difficult to paint a picture of the retail banking sector with such a broad brush, because there are around 7,000 banks and 7,000 credit unions. As it is in any industry, some suck, most are okay, and a few a really great. The reality is that there are many very good banks — even some very good big banks — and there are some really ugly credit unions.
In the spirit of keeping mythology and stereotypes alive, the mainstream media often glosses right over truths that don’t fit with the “good vs. evil” slant of their stories. Very few banks were directly responsible for the mortgage meltdown. For instance, Smalltown Community Bank wasn’t selling mortgage-backed securities and credit default swaps, yet they are often judged guilty right alongside the big banks. (The American public — including journalists — make few distinctions between community banks, regional banks, super-regional banks, national banks, global banks, private banks, commercial banks, investment banks… the attitude is that “a bank is a bank is a bank.”) However, Smalltown Community Bank probably was guilty of underwriting subprime loans, so they do share some culpability… right along with a few thousand credit unions who did the exact same thing.
As is usually the case, the real, full, honest story is much more complex than the average reporter has time for and the average American has interest in. Despite how the story has been widely presented by the press, credit unions were tainted by TARP and the mortgage meltdown.
Are credit unions facing the same pressures as banks? The short answer is “yes.” Everyone is struggling, banks and credit unions alike. If you are in the banking space today, you face greater pressure to build capital reserves. You can’t afford to pay any interest on deposits because the lending market is so soft; no one needs deposits because there aren’t enough qualified borrowers to go around. Thanks to Dodd-Frank and a bunch of other new regulations, the cost of compliance has risen significantly for everyone. Bottom line? Now is not a good time to be offering consumer-level retail banking services. It’s a struggle.
Now, are credit unions better positioned than banks to weather through this storm? Yes. Why? Because they enjoy a federal tax exemption that gives them an edge when managing their bottom lines. However, this tax exemption is not without its own controversy. Bankers hate, hate, HATE it and lobby ruthlessly to have it quashed because they think it is grossly unfair: “Why should credit unions get a tax break for offering the same services as banks?” That’s the banks’ argument. Whether politicians agree or not seems to be something that falls neatly along party lines: Republicans support banks, Democrats support credit unions. However, few people really know why credit unions even have this tax exemption (including bankers, politicians and even credit union folks).
Beyond the tax exemption, there are some key differences between banks and credit unions. One main thing that separates (some) credit unions from all banks (even community banks) is dividends. Privately held companies don’t usually distribute dividends to their customers — only to shareholders. At credit unions, members are the shareholders, and at some credit unions they decide to distribute dividends to members. If you have a home loan, auto loan and checking account at a credit union that pays healthy dividends, you can get a couple hundred bucks back every year.
Do fewer credit unions charge overdraft fees than banks? Yes, but you can still find plenty of credit unions charging overdraft fees. And you can also find banks that don’t. Do credit unions charge less for their overdrafts than banks? Yes, generally speaking. But if a consumer doesn’t do their homework, they could chose a credit union that charges more for overdrafts than they are paying today.
But the credit union industry is not without its own troubles. A number of credit unions have failed in the last few years. Nowhere near the same rate as banks, but still… plenty. You’d have to check with the NCUA for accurate data on the number of failures, but for every one credit union that was officially seized by regulators, there are probably 10 others that were looking at a narrow range of unsavory options — basically “merge or die” — and aren’t reflected in the NCUA’s failure statistics.
The Financial Brand has predicted that there is a limited future for credit unions that currently have less than $100 million in assets. Presently, 5,700 of the 7,000 or so credit unions have less than $100 (79.6%).
If a consumer picks a small credit union, there is a very real chance that they will have to endure one or two mergers in the next decade. Some consumers really dislike mergers in the financial industry. “The big get bigger,” they think. “What makes credit unions any different than banks?” Members of the acquired credit union have to endure hardships like new cards, new checks, new online banking and bill pay systems, new fees/rules and possible branch closures.
Usually the main consumer issue driving the decision to go with a “big bank” vs. a community bank or credit union is branch access, and ATM access to a lesser extent. For heavy branch/ATM users, the limited number of locations offered by community banks and credit unions may be a deal-breaker.
The bottom line is this: Consumers need to do their due diligence. They should make a list of what’s important to them — what they’re looking for in a their banking provider — and shop around. And they probably shouldn’t pick a bank or credit union simply because they’ve got the closest branch. Research says most consumers will pretty much use the branch just to open their account, then never step foot it again (or no more than a few times a year).
The mainstream media likes to suggest it’s all rainbows and butterflies at credit unions. Is the credit union industry generally more consumer-friendly than banks? Yes, generally speaking. But credit unions have plenty of their own warts and peccadilloes too.