When it comes to keeping your money stashed in a safe place and taking advantage of financial products, the local big banks tend to be the go-to source for many Canadians. While banks certainly do serve their purpose, they are not the only financial institutions available for consumers to do their banking.
Credit unions are also popular institutions that offer Canadians many of the same types of financial products and services. That said, there are specific differences between the two that consumers should know about before they choose which entity to entrust with their money.
Profit Versus Non-Profit
Banks are for-profit organizations. Every transaction that is made with a bank is done for the purpose of making a profit in addition to providing a service to customers. All earnings are paid back to members and stockholders. Banks essentially make money by lending funds at interest rates that are higher than the cost of the money loaned. In particular, banks make money in interest from loans and interest payments from securities they own.
Credit unions are not-for-profit institutions. They don’t earn money in the same way that banks do. They do not exist to make a profit, but rather they operate to serve their members. Credit unions don’t pay dividends to outside stockholders as is the case with banks.
Regulations
Big banks are overseen by the federal government, which is also tasked with monitoring foreign banks that operate within Canada. Banks are legislated by the Bank Act.
The majority of credit unions are governed by their respective provincial governments that stipulate how they’re permitted to borrow, lend, and invest. While credit unions are member-owned, some are members of the Canadian Credit Union Association. Credit unions are also legislated by the Bank Act.
Safety
In the event the financial institution goes under or is unable to meet its obligations, your money will be safe regardless if you go with a bank or credit union. Banks are typically members of the Canada Deposit Insurance Corporation (CDIC) and provide insurance on your deposits through them. The CDIC insures up to $100,000 dollars in your chequing and savings accounts. Credit Unions, on the other hand, are covered through provincial deposit insurance plans. If you’d like to know about how your money is protected, talk to your credit union as the plan’s coverage varies by province.
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Customers
There is no real difference between the types of customers that are served by banks versus credit unions. Any Canadian who has the appropriate identification is eligible to open up an account at either financial institution.
That being said, consumers should understand that credit unions tend to have stricter rules regarding who can be serviced at particular locations. Typically, credit unions only serve those who are located within a specific geographical area. Credit unions are typically located in more rural areas and communities that are not well served by bigger banks.
Membership at credit unions typically requires the purchase of a share and the ability to meet certain requirements. As a shareholder, members are given the power to vote if there is ever an issue regarding how the organization is being operated. Members will also have the benefit of getting dividends every year from the shares owned. At banks, shareholders are typically investors, not members or necessarily bank customers.
Learn how to get a free chequing account in Canada.
Account Types
Credit unions and banks don’t differ very much in terms of the types of accounts that members can open. Products such as savings accounts, checking accounts, loans, mortgages, credit cards, wealth building, retirement, and investment products are all offered at both types of institutions.
However, banks tend to offer a wider variety of account and product types compared to credit unions. In addition, they tend to be more focused on commercial loan products and others that are more likely to bring in a sizable income. On the other hand, credit unions are more focused on smaller consumer loans.
For our guide to automatic savings and payments, look here.
Board Members
Credit unions have boards that are made up of volunteers who have been voted in by the members. That means actual customers of a credit union may be on the board. On the other hand, board members at banks are appointed and paid by shareholders.
Sharing of Resources
With big banks, resources are rarely, if ever, shared amongst each other. Every banking institution will have its own ATM machines and services that are to be used exclusively by their own members and customers free of charge (though others may use ATMs for a fee), and no resources or information is ever shared amongst each other.
Credit unions are more cooperative in nature and tend to share their resources and work together. Members are allowed to use the services and machines of other credit unions, no matter the location, free of charge, provided they are part of the same financial institution.
Technology
Large banks are typically on board with the latest in banking technology and tend to offer many convenient online and mobile app services to clients. Banking apps can be used on tablets and smartphones, so clients can do their banking on the go wherever they happen to be.
The same can be said for credit unions. In fact, credit unions offer the same level of innovative technology to their members that is comparable, if not better than what traditional banks have to offer.
Fees
The fees that banks charge their clients are usually higher than those charged by credit unions. This is especially true of the larger banks in the country. For example, there are credit unions that offer free chequing accounts with no requirements to be met such as minimum monthly balance.
Interest Rates
Looking at banks and credit unions in terms of borrowing, credit unions typically have lower interest rates on loans. They are also usually more flexible than banks when approving applicants for loans.
Bank vs. Credit Union Summary
How to Choose Between a Bank and a Credit Union
Understanding the differences and similarities between banks and credit unions in Canada is the first step in deciding which option best suits your financial needs. Next, you need to determine what benefits, accounts, and products you need to be able to access. Make sure you consider:
- The types of chequing and savings accounts available
- Fees
- Minimum balances
- Interest paid
- Loan products available
- Mortgages
- Auto financing
- Lines of credit
- Credit cards
- Branch locations
- Reputation
- Customer service options
Final Thoughts
There are many traits of both banks and credit unions that are similar, but there are other characteristics that differ. When it comes to choosing who to bank with, you also need to consider your lifestyle, where you live, how you like to bank, and even potential future financial decisions. Ultimately there is no right answer, just the best option for your unique needs.
