How Credit Unions Compare to Banks - The Risk of Failure

of all the industries banking may very well have the worst reputation perhaps behind only telecom companies with all the past controversies the financial crisis of 2008 and the recent Regional banking turmoil of 2023 you can see how the reputation of the area doesn't hold out much better than the companies that keep you on hold for two hours as you try to figure out why your phone bill tripled last month if only there were a better way an institutions that let you circumvent the banks where customers had a say in how things were run well that might sound like my lead up to my introduction of a new cryptocurrency rug pull idea it turns out that there is a traditional institution that's not far off of this ideal it's called a credit union and unlike Banks they actually operate as a not-for-profit with their number one priority being the financial success and security of its members but our credit unions immune to the Troubles of the banking sector and if credit unions are so great why is it that only 16 percent of consumers use one as their primary financial institution well let's go over the basics of what a credit union is and how they shape up to the big banks on today's plain bagel it's not often that you hear the words finance and not for profit in the same sentence but credit unions are indeed a bit of an outlier in the space because they are in fact a not-for-profit Cooperative a jointly owned and democratically controlled organization that helps members meet their financial needs they operate much like a bank taking deposits and lending out funds but whereas a bank strives to earn money for shareholders a credit union strives to service the financial needs of its members who are in fact the owners of The Cooperative when you open an account at a credit union you're actually given a share of the company which gives you a right to vote in board of directors elections and important corporate events now you aren't able to sell this share for a profit but you do benefit financially from it as money earned by the credit union is put back towards the benefit of its members with the amount being used to reduce fees and interest rates increase savings rates invest in the community itself or in some some situations actually distribute the amount among members depending on the credit union you're with and the products that you own with them so while a credit union will largely look and feel like a bank offering many of the same basic services like checking savings accounts car loans mortgages even credit cards at times that membership piece is an important differentiator traditionally Credit Unions would actually require a common Bond meaning that members either worked in the same industry lived in the same area or perhaps were part of the same religious or cultural Community these days there are Credit Unions that allow pretty much anyone to become a member and while they may charge a nominal membership fee for joining it can be well worth it according to figures reported regularly by the National Credit Union Administration Credit Unions on average offer better rates across the vast majority of financial products in the US speaking of the ncua credit unions also offer similar safety nets to the banks much like FDIC insured Bank deposits many credit unions in Canada and the US offer deposit coverage with the National Credit Union share Insurance Fund in the U.S providing 250 000 per member in the case of the Credit Union's failure while provincial funds in Canada provide varying amounts with some covering 100 of applicable deposits it really does sound like the perfect solution an institution with a Community Focus that not only prioritizes members over profits but actually offers a superior product at times how is this not a bigger thing no seriously you're probably wondering why only about 16 of American consumers use credit unions as their primary financial institution in y1 survey by gold banking rates showed younger Generations showing less interest than older Generations in joining a credit union well one contributor is likely just awareness one survey found that roughly a quarter of Millennials didn't know how to describe what a credit union was with roughly a third thinking that they were just small banks with limited offerings but even for those who understand the benefits of banking with a credit union there are some notable drawbacks that could be turning them away even if they aren't the biggest fan of the National Banks outside of many credit unions limiting their membership access to certain populations Credit Unions often don't have the same physical presence as National Banks with majority of credit unions being small locally focused institutions even the Navy Federal Credit Union the largest American Credit Union with 350 branches worldwide only has a fraction of the physical presence of a bank like Wells Fargo which has 4 900 branches across the country now to combat this many credit unions have partnered together to offer their branches to any member and actually share networks of free ATMs with this network actually being larger than many banks in Canada and the US so physically accessing your money isn't necessarily a problem if you Bank within your borders but because National Banks will often have larger International networks anyone who travels might have a harder time accessing their funds if they do bank with a credit union credit unions also typically leg Banks when it comes to their digital or technology offerings because of their smaller size online portals or apps for a credit union may not be as seamless or comprehensive as that for a larger institution which according to a mobiquity survey is an important variable for younger Generations in determining where they Bank I'm sure many of us can personally speak to the importance of convenience in deciding who we work with and while Credit Unions do offer better rates on average than Banks they don't always have the most competitive rate in the US for example the highest savings rates at the moment are all currently offered by banks with credit unions actually lagging by quite a bit you see for all their faults Banks do themselves have a few operational advantages with one being the profits that they earn from their other business lines which may enable them to offer more competitive rates or promotions from time to time Credit Unions also tend to service lower income customers with 55 percent of credit unions having a low income designation which makes sense since Credit Unions largely originated as a way to provide Fair Financial products to underserved communities while this does end up providing important Financial Services to less advantaged populations it does unfortunately come with a drawback to profitability as it's much cheaper to manage a single client with one hundred thousand dollars than 100 clients with one thousand dollars each finally Banks do tend to benefit from meaningful economies of scale and can typically offer a wider range of services for clients with more complex needs federally insured U.S banks have 10 times the deposits of federally insured Credit Unions with 75 percent of credit unions in the US having less than 211.3 million dollars in total assets so while Credit Unions do seem to be doing a number of things right banks are still able to compete in a number of ways but how do they compare on the topic of failure in the US we've seen a number of regional Banks fail after a run on deposits would a not-for-profit credit union be able to circumvent this sort of risk well not entirely you would think that being a not-for-profit would disincentivize a credit union from pushing the envelope of risk which has been a common contributor to many past crises but as I've highlighted previously a bank run could take down even the healthiest of Institutions and Credit Unions do at times fail like the banks with credit unions not being immune to mismanagement that being said it does seem like at the aggregate level Credit Unions do have some advantages here firstly because Credit Unions typically focus on Personal Banking and lower income customers they typically have a larger share of their deposits covered by Deposit Insurance in fact ninety percent of total ncua member deposits are covered by that 250 000 Insurance whereas the banks that have failed had the majority of their deposits uninsured leaving many customers to withdraw their funds for fear of losing their money secondly Credit Unions tend to have less of their money tied up in longer term assets which was a big contributor to the collapse of Silicon Valley bank and First Republic Bank only 4.8 percent of Investments held by credit unions had maturities extending past 10 years as of 2022 year end while the loan profile is much more Diversified between long and short-term loans now importantly these are aggregate amounts so any given Credit Union could deviate meaningfully from these levels we also haven't seen the March and deposit figures for ncua insured credit unions so we may very well see an impact from The Fallout of Silicon Valley Bank that we just aren't aware of yet but so far Credit Unions have proven quite resilient in the face of the banking turmoil in fact while three credit unions have failed so far in 2023 the total deposits for the three of them sits at just 35.7 million dollars in the world of banking that is a minuscule amount Silicon Valley Bank had 173 billion dollars of deposits alone when it failed credit unions are also highly trusted by customers when compared to larger Banks the 2019 Chicago Booth Kellogg School Financial trust index that's a mouthful gave Credit Unions a trust rating of 58 compared to National Banks at 38 percent in the broader Finance sector at 41 percent trust from your customers does not make you immune to a crisis but again the combination of these variables certainly does help even still in deciding where you want to bank yourself you should consider all your options and what's best for your unique situation that might be a credit union if a local Focus personalized experience and member control are important to you if you have access to an exclusive Credit Union based on your employment status or some other membership you should certainly check it out and see if there are any deals available you might have access to rates not accessible elsewhere but if you're a big traveler who needs a comprehensive online experience and more complex products a larger National Bank might be the better option there are also other Alternatives that you can consider like Community Banks online only banks and fintech offerings although there's an important caveat on that last one which we'll talk about in a second and there's no harm in splitting your funds among the different institutions if you can't decide which one you want to go with so long as you don't have a problem keeping track of multiple accounts you can always consolidate at a later date the important thing to ensure is that regardless of where you put your money you have that deposit insurance if you decide to go with the fintech solution make sure that they have a verified partnership with an insured institution you might be able to get a higher return on your savings with an uninsured offering such as within the crypto space but unless you want to treat your checking or savings account like an Investment Portfolio with the risk of going to zero you should use the safety nets available to you for your core cash Holdings so that you don't need to spend your time or energy worrying about whether the money you rely on is safe so overall credit unions are a very viable choice and may actually have a better product so you should certainly compare all your options but if you have that Deposit Insurance you should have protections regardless of where you decide to bank which will let you dedicate more time and energy to navigating the 20 call transfers they'll put you through trying to reach Rogers tech support that's a Canadian Telecom joke for you thanks for watching hope you found this video helpful if you did please make sure to like subscribe all that good stuff it does help the channel tremendously and let me know your thoughts on credit unions down below do you currently bank with one are you considering switching or health do you think they stack up against the banks thanks for joining me today we'll see in the next one foreign

Channel: The Plain Bagel

Views: 142,457

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Length: 12min 15sec (735 seconds)

Published: Fri May 26 2023