***Disclosure: I am a member of three credit unions: Libro, Alterna, and DUCA. I have not been compensated for this piece (nor do I earn any income from my blog). I am a co-operative fanboy who genuinely thinks credit unions are awesome.***
I received lots of feedback from my last post How To Fire Your Bank. Lots of readers were positive, some defended the big banks, but most people just wanted to know more. I couldn’t believe how many people assumed there had to be some sacrifice involved with joining a Credit Union, and that they would have to settle for fewer services. When hearing this in person, I gleefully pull out my smartphone and show them the map of ATMs and one of my mobile apps for easy banking. You can check it out yourself by visiting this site to see which institutions are part of The Exchange ATM network: http://www.the-exchange.ca/default.aspx?PageID=1020&LangID=en
I deliberately wanted my previous blog to be a practical how-to guide, without digging deeper into the ‘why’. I didn’t want to overwhelm people and lose them in the weeds. This piece is a bit deeper down the rabbit hole, so come along with me to find out why Credit Unions are awesome:
1. They’re Not Driven by Profit
I was disgusted to hear about how Wells Fargo pushed their employees to set up unwanted accounts (and charged unwanted fees) for unsuspecting clients. And don’t assume it’s any better in Canada. Banks are beholden to their shareholders and have a legal duty to maximize profits, often by exploiting customers, employees, and the planet.
Credit Unions, on the other hand, are structured as co-operatives. That means that their customers are members, and members come first. Rather than maximizing profits, their goal is to maximize member satisfaction.
2. More Democratic Governance
Publicly traded companies (including the big banks) are governed by a Board of Directors that is only accountable to shareholders. Votes are conducted in accordance with one-share-equals-one-vote rules, meaning that big shareholders have a lot more say than small shareholders. Credit Unions (and all co-ops) still have boards, but they are accountable to members (i.e. you). These votes are conducted according to a one-member-equals-one-vote rule, meaning that all members get an equal voice regardless of size or wealth. Simply put, Credit Unions are more democratic than banks.
3. Community Investment
To really understand why Credit Unions are awesome, you first need to understand how the banking system works. Imagine you just received $1,000 (woohoo!), and your first instinct is to deposit your new money in the bank. Now we all know that the bank will loan most of it out. That’s their business model. Would you be surprised to know that banks only keep about 5% as cash? Probably not. But here’s where things get fishy.
Instead of keeping $50 (5%) of your deposit and loaning out the other $950 (95%), standard practice is to keep the entire $1,000 (5%) deposit and create $19,000 (95%) in loans out of thin air. That’s right, banks and credit unions alike have the ability to create money in the form of loans at a ratio of about 19-to-1. That’s how they ‘make’ their money. Confused? You’re not alone. Here’s a one-minute video that explains how that happens using a nice round 10% deposit ratio:
The difference between banks and Credit Unions is really about where those loans are going. Banks’ clients are huge, giant companies. Among them are tar sands developers, global mining companies, and pipeline projects . So your $1,000 deposit is creating $19,000 of loans for these types of companies—yuck! Credit Union members are overwhelmingly local families and small businesses. That means that your $1,000 deposit is creating $19,000 of loans largely to support local mortgages and small businesses.
Credit Unions offer the same services as traditional banks, with the added bonus of knowing that your money is staying in your community. Their governance structure is much more equitable, and we can be confident that their decision-making will put members first. People who switch from a big bank usually end up paying lower fees, while feeling good about the positive impact of their decision.
Now do you see why I suggested Firing Your Bank?
I have followed your blog for the past year and credit you with my decision to join a credit union. Also, your blog is how I got clued into CoPower bonds and the like. So far so good!
I still keep an account with a big bank, only because I travel overseas for long periods of time, and withdrawing money from international ATMs can be expensive unless you have the right type of account at certain banks. Selfish but it’s a compromise I am making right now.
Thank you for your efforts to continue sharing useful information about existing alternatives out there for Canadians.
Over the years I also had accounts with big banks but when they started to phone me to tell me how much they valued my account and then tried to sell me stuff I started closing those accounts. I told them the credit union valued ME and not just my account.
Now my credit union is my only bank account, holds my mortgage and line of credit and handles some of my investments (a friend handles the majority of my investments and when he retires it all moves to the credit union).