Difference Between Credit Union and Bank

Edited by Diffzy | Updated on: April 07, 2022

       

Difference Between Credit Union and Bank Difference Between Credit Union and Bank

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Introduction

A bank is a financial institution that is licensed for receiving deposits from customers and also provides loans. Banks also provide financial services to the customers such as wealth management, exchange of currency, and locker boxes. There are several nationalized and private banks operating in our country. banks can be classified as retail banks, commercial banks, and investment banks The regulating authority for a bank in India is the Reserve bank of India and in most countries, the regulating authority is the national government (of that country) or the central bank.

Credit unions are non-profit organizations that are mainly meant for lending money to borrowers at low-interest rates. They are locally based and their main purpose is to serve the customer's needs. Anyone can become a member of the credit union voluntarily if they have a common bond with others. Some common bonds are

1. Community bond - Bond formed when members live in the same area 

2. Occupational Bond-Bond formed when members of the same profession form a bond.

3. Associational Bond- Bond formed between members of the same association, organization, or society.

A credit union, a type of fiscal institution analogous to a marketable bank, is a member-possessed non-profit fiscal cooperative. Credit unions generally give services to members analogous to retail banks, including deposit accounts, provision of credit, and other fiscal services. In several African countries, credit unions are generally appertained to as SACCOs (Savings and Credit-Operative Societies). Credit unions offer one or more similar services as a bank but the terms used for banking functions are different. Some of the terms are instead for saving accounts they use share accounts, for share draft accounts they use cheque accounts, share term certificate (for share certificate ). Only terms like online banking, debit cards, and credit cards are the same.

Bank vs. Credit Union 

The main difference between credit unions and banks is that persons who are holding accounts in credit unions are either they are members or owners so the selection of the board of directors is based on one-to-one meetings. This election is independent of the fact that how much amount they have invested. Credit union vision and mission is to "SERVE THE PEOPLE "while for banks it is "SERVE THE PEOPLE BUT ALSO GAIN PROFIT ".

By the survey conducted on different customer groups, it was evident that credit unions have a higher rate of customer satisfaction as compared to banks because the procedure of lending money is much simpler and hassle-free because they are committed to improving the financial situation of the customers. Credit unions are owned, governed, and created by individuals so they are tax-exempt organizations. The number of automated teller machines (ATMs) is large for the bank as compared to credit unions.

Differences Between Bank and Credit Union in Tabular Form

Table: Bank vs. Credit Union
Parameters of Comparison
Credit Union
Bank
Definition
A bank is an organization that keeps money safely to its customers. It's a place where you can deposit money out, save, borrow or exchange money.
The credit union is a nonprofit organization from which members can borrow money at low-interest rates
Regulated by
Federal Reserve
Owned and governed by members
Profit-making
Banks are for-profit

Credit Unions are for-profit
Vision
Banks are for serving the customers and gaining profit
Credit unions are for serving the customers
 
Customer satisfaction
Customer satisfaction is low
Customer satisfaction is high
Interest rates
Interest rates are high
Interest rates are low
Variety of products
In bank options are diverse
In credit unions options are limited
Regulatory fees
Since banks depend on making a profit, banks charge more fees for their services. Sometimes non maintenance charges, SMS charges, checkbook charges are very hectic
Interest rates are lower as compared to banks.
Open
Banks are open to all customers who don't have a bad banking history
Credit unions are open only to their members you may not get a loan if you are not a member of its unions
APY on saving vehicle
May offer Higher APY on saving vehicle
May offer Lower APY on saving vehicle
Branches and ATMs
Likely more branches and ATMs
Fewer branches and ATM
Financial technology
High
Low
Membership
Does not require any membership
Membership is needed
Account Insurance
Accounts FDIC-insured up to $250,000
Accounts NCUA-insured up to $250,000
Technology
Banks' mobile apps and technology are more advanced
Credit unions do not have so advanced technology
Rules and Regulations
In banks, rules are strict and not flexible
In credit unions, rules are more flexible and they rely on serving customers.
Role of Individual
In a bank, you are an investor.
Credit Union you are a member.
Right of Vote
In Banks, customers do not have the right to vote
In Credit Union, you are a member so you have the right to vote.

What is a Bank?

It is a financial institution that is licensed by the authority for providing loans and Different types of services to customers. Different types of services such as lockers, loans against securities, currency exchange, and adhar preparation are also carried out at banks.

Classification of Bank

Banks are classified as follows 

a. Retail Bank

b. Commercial Bank

c. Investment Bank

d. Corporate Bank

In India, banks are categorized based on their function.

Agricultural Bank: In India, the main job of these banks is to lend short-term loans for purchasing seeds, fertilizers, and other agricultural types of equipment.

Post office bank: Created for small saving accounts and also withdrawal services from ATMs.

Foreign Exchange Bank: Working for the sale and purchase of foreign currency and exchange of currency.

Co-Operative Bank: banks that are covered under the co-operative societies Act. Its main vision is" no profit, no loss "and is regulated by the Reserve bank of India.

Retail Bank: Offering the services such as saving accounts, fixed deposits, and recurring deposits. Also, consumer loans and car loans are available.

Online bank: As the name suggests online banks help in managing customers manage their accounts online so they do not need to visit a branch.

Functions of Banks

The main functions of marketable banks are accepting deposits from the public and advancing them loans. The  ensuing points punctuate the top six functions of commercial  banks are as follows

The functions are

1. Accepting of Deposits by the customers.

2. Advancing Loans to potential takers

3. Credit Creation by different sources

4. Backing Foreign Trade

5. Agency Services

6. Eclectic Services to Guests. Accepting of Deposits

Generally, the banks accept four types of deposits from the public which are as given follows

(a) Current Account or Demand Deposit

Under this account, the depositor can withdraw the plutocrat whenever he requires it.

Typically no interest is paid by the bank because the bank can not use this plutocrat in earning and he must keep himself ready to meet the demand of the client. He must keep a cent percent reserve against the deposit. In this account, the depositor has to maintain a minimum balance. Sometimes a small interest is paid to the people who keep large balances.

Under this account, the depositor isn't free to withdraw any quantum-like current account. He can withdraw only a specified sum of plutocrats in a week. Then the depositor gets lower interest in comparison to Fixed Account.

(c) Fixed or Time Deposit Account

Under this account, deposits are accepted for a fixed period say one, two, four, or five times or over. The plutocrat deposited in this account can not be typically withdrawn before the expiry of the agreed period. The rate of interest on this account is more advanced than on other accounts.

(d) Home Coffer Account

Under this account, a safe is handled by the bank for the guests. Coffer is locked and the bank keeps crucial with him. Guests put their small savings in the safe and after two to three months the guests take the safe to the bank where the banker unlocks it before the client and makes credit in the client’s account.

A nominal rate of interest is allowed to the client.

2. Advancing Loans

A bank lends a certain chance of cash lying in deposits on advanced interest rates than it pays to the depositors. This is how it earns gains and carries on its business.

The bank advances the loan in the following manner

(a) Cash Credit

This type of loan is granted to businessmen against certain specified securities. To a new client, a loan account has to be opened from where the plutocrat is withdrawn by cheque but he pays interest on the full quantum.

(b) Call Loans/ Plutocrat at Call and Short Notice

They're veritably short-term loans and are substantially given to bill brokers for 15 days. They're advanced against first-class securities. This can be recalled at a veritably sudden- notice.

(c) Overdraft

Overdraft is the installation extended by the banker to draw a sum lesser than the balance lying in his current account. The businessman is charged interest only on that quantum by which his current account is withdrawn and not by the full quantum of the overdraft sanctioned.

(d) Discounting Bills of Exchange

Still, the bank gives, If a creditor wants plutocrat incontinently and has a bill of exchange.his plutocrat by blinking the bill of exchange. The banker deposits the quantum of

the bill in the current account of the bill-holder after abating the rate of interest for the period of the loan which is typically not further than 90 days. When the bill matures the bank gets payment from the banker.

3. Credit Creation

Credit creation is one of the most important functions of marketable banks. To earn a profit, the bank accepts deposits and advance loans by keeping small cash in reserve to meet the day-to-day requirements of the guests. When a bank gives the loan, it opens an account in the name of the loan taker and does not pay him in cash but allows him to draw the plutocrat according to his conditions. By granting a loan, the bank creates credit or deposits.

4. Backing Foreign Trade

The commercial bank acts as a helping hand to its customers and helps in foreign trade by providing finance to its guests and by accepting foreign bills of exchange. The bank also encourages the documents like D/ A( Documents against acceptance) and D/ P ( Documents against payments) in foreign payments. The distribution and selling of foreign currency are also carried out here.

5. Functions of the bank as agency service

A bank discharges agency services on behalf of its guests which are as follows

(i) By a collection of bills of exchange, cheques tips, etc. on behalf of his guests.

(ii) It buys and sells shares, securities, debentures, etc. for its guests.

(iii) The bank remits plutocrat to different places by bank drafts on apothegmatic transfer (T/ T) on behalf of its guests.

(iv) It discharges the functions of marketing, works as a trustee, director, or The factor for its guests. (v) It gives proper advice to the guests in the matter of correspondence and other matters of business.

6. Eclectic Services

Besides the below-mentioned services, there are several other functions bestowed on a commercial bank

(i)  It underwrites the company debentures and shares.

(ii) It provides lockers installation to the guests where the guests can keep the precious documents and beautifiers.

(iii) It issues trippers cheques, letters of credit, etc. to the guests and it accepts bills on behalf of the guests.

(iv) It provides information’s about the guests.

What is a Credit Union?

Credit Union: They are non-profit organizations that operate for providing the members the same financial services as banks but at lower interest rates. Credit unions do not emphasize making money. In a credit union, the members elect their board of directors by vote and they are responsible for supervising the services offered by the credit union.

Services Offered by Credit Union

1. Providing loans for auto, home, consolidation, and personal

2. Online bill payment for various facilities

3. Money orders and deposit boxes.

4. Debit cards and credit cards.

5. Mortage

Types /Examples of credit Unions

For classifying the type of credit union it is important to understand membership.

1. Local Credit Union: They are created to serve the needs of a particular area, city, or country.

2. Employer credit Union: Sometimes employers create a credit union for providing services to a specific company, Profession, or industry.

3. Federal Credit Unions: National credit unions with few membership restrictions are known as federal credit unions. Generally, it requires the individual to be at least 18 years old and must be a U.S citizen

4. Group credit Unions: Serves small fraternal organizations such as churches or NGOs which support social causes and environmental causes.

Differences Between Banks and Credit Unions in Points

1. In banks mobile apps and technology are more advanced while in credit unions mobile technology is not so developed 

2. Banks' main purpose is profit-making apart from serving the customers. Credit Union main advertises itself as a non-profit organization meant for serving the customers 

3. Banks have more Automatic teller machines (ATMs)and branches. The credit union serves their customers through CO-PO shared branches and ATMs and are very fewer in number.

4. Credit Unions provide better customer service. In banks, rules are very strict and they are not flexible.

5. In Banks, customers do not have the right to vote. In Credit Union, you are a member so you have the right to vote.

6. In banks anyone can open an account whether you are an individual or a company. In a credit union, you cannot open an account unless you are a member.

7. In banks you get a variety of products such as gold loans, business loans, and credit cards. Credit Unions you get lesser services 

8. Banks should make money for their investors so the fees such as account handling charges, ATM charges, and others are very high. Credit unions have No or fewer fees account for customers,

9. Banks are more convenient to customers because of a large number of ATMs and Advanced mobile technology. Credit Unions are inconvenient because due to a lack of branches.

Conclusion

In a credit, union customer is the king because he also has the right to vote on his policies In banks you can open an account easily but the convenience charges are very high. You should consider a credit union if you are looking for a loan because their rules are flexible and suited for customer needs, while banks' process of obtaining a loan is difficult for banks. Services such are retirement pension plans, business loans, and Farmer's loans are only available in banks i.e the variety and number of services are more at banks. You will have to choose wisely between the credit union and bank considering the risk factor and type of service required by you.

References

  • https://www.uoficreditunion.org.
  • https://www.Forbes.com

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