CULTURE

A brief history of American credit unions and banks

Do you understand the difference between a credit union and a bank?

Big banks and social responsibility don't typically go hand-in-hand, but there is a bedrock financial institution that was formed wholly out of a noble ethos. The brutal winter of 1846-47 led to widespread famine, so Friedrich Raiffeisen, a rural German mayor, set up a system in which wealthier citizens put cash into a fund used to buy grain to be loaned to those suffering from the famine. This, in turn, led to a community bakery. The "bread society" project worked. When the famine ended, the less fortunate paid back the benefators in cash. Raiffeisen would expand on his largesse with an "aid society" that provided low-interest loans to farmers to get around the common usurary practices, and set up a charity for abandoned children. Eventually, in 1864, Raiffeisen established the first rural cooperative lending institution, in effect, creating the first credit union.


Credit unions wouldn't come to the United States until 1909. That year, the first one opened in New Hampshire, and the first comprehensive credit union law passed in Massachusetts with help from Edward Filene of department store fame. It served as the model for the FCU Act, which was signed by Franklin Roosevelt in 1934, authorizing federally chartered credit unions in all the states.Coming in the middle of the Great Depression, the FCU Act gave Americans the chance to join member-driven co-operative non-profit financial institutions like the "bread society" of yore.

"The membership orientation of credit unions is designed to serve the consumer, particularly those of more modern means, through the affiliation with a group," says Greg McBride, chief financial analyst at Bankrate.com. "Today, credit unions and banks have more similarities than differences, although they're generally much smaller and some may have a single branch."

The primary drawback to credit unions is one of size. They don't have branches on every corner and they not offer the 24/7 service of our banking overlords. Credit unions also don't tend to have the full menu of services as the giants, like say wealth management or some small business loans. It varies, of course. The larger credit unions, like top gun 7-million-member $90-billion-in-assets strong Navy Federal Credit Union offers business loans, but most have much smaller holdings.

For the Monopoly Man, size matters. Who else is going to back another major development on Marvin Gardens? Let the monocled oligarch have Wells Fargo. One important facet of credit unions is that they're not Wells Fargo, there's no incentive to conjure 3.5-million fake accounts out of thin air.

"They have the same regulatory rules as banks, but the not-for-profit status shields credit unions from some of the more nefarious practices of their counterparts," says McBride.

Credit unions got a big boost following the 2008 financial crisis and the Occupy Wall Street movement that grew out of it. In 2011, a California woman tired of her high uber-bank fees started a social media event page calling for a "Bank Transfer Day" where money would be moved to credit unions. According to Bill Cheney, CEO of the Credit Union National Association, it worked. Credit unions added a net of some 2.2-million members between June 2011-2012, double the average over the previous ten years. As recently as the second quarter of 2017 saw credit union growth across the country in nearly every category, according to the National Credit Union Administration. There's now 102-million credit union users in the United States, so the big banks have taken notice. Just last week, members of state banking associations called on Senate Finance Chairman Orrin Hatch to tax the larger - yet still non-profit like so many mega-churches-credit unions.

Banking, however, is not an altruistic endeavor. There are still reasons to go with credit unions, such as:

Better terms

One of the most attractive aspects to credit unions is the money saved. Consumers can get better rates on deposits and loans, lower or at least reduced fees, and the balance requirements are much more user-friendly.

Democratic decision-making

One credit union member, one ballot. Board seats and official positions are voted on by the membership. Non-profit means credit unions are beholden to the community within, not shareholders.

Low barrier to entry

If someone meets the membership requirements - be it geographical, organizational, social, or even philanthropic (Alliant Credit Union is open to anyone who makes a $10 charitable donation to Foster Care to Success) - membership fees are reasonable and don't require a crazy level of assets at all times. Many credit unions are specifically designed to help customers get a foothold in the American baking system. A great example is California's Golden 1 Credit Union, which offers a free account to students ages 16 and 17, so long as they maintain a B average or higher.

Credit unions are an unsung piece of the American financial structure, but they can work for you, even if you're generally happy and at a large bank (that probably has ridiculously punitive overdraft fees.) Keep in mind, it's not an all-or-nothing proposition. You can do a piece of your overall banking at a credit union. Greg McBride says too many consumers sign up with a single bank and miss out on opportunities to save money by diversifying. He advocates the same approach Smokey Robinson's mother did for dating.

"It's prudent to include credit unions to look for the best deal," he says. "Consumers should always shop around."

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