I've been wondering this - what exactly makes a credit union different than a bank (other than the membership criteria)?

Well, I cannot believe that I am the first one to jump in on this. Anon - you are going to receive all sorts of answers on this and most will say that there is not much (if any) difference. Since I happen to work for a credit union, I will present my side first.

Credit Unions were originally developed to help out employee groups in small communities to gain financing when it had been very difficult to obtain. Nowadays, financing is not as difficult and credit unions have evolved with the changing markets. We are non-profit groups which means that we do not have to pay taxes. We are able to pay back the profits of the year in the form of lower rates, higher dividends, and creative financing options that we may not have otherwise been able to offer. We service both employer groups and the community at large.

Now it is time for the banks to chime in...

Very good response, Space!!

Based on the tax and membership structure, banks and credit unions compete on an unlevel playing field.

Also, bank deposits are insured by the FDIC, credit union deposits are insured by the NCUA.

Banks are owned by stockholders, and are operated for the purpose of earning money to pay to the stockholders. (Please don't think I'm saying there's anything wrong with that!) The depositor/borrower of a bank is a customer, nothing more. The stockholders elect a board of directors to oversee the management, and generally pay the board for that work. A stockholder's voting power depends on how many shares of stock he/she holds.

Credit unions are non-profit cooperatives, and as such are "owned" by the members (i.e. the depositors). The members elect directors to oversee management, and directors are generally not compensated for this service. Members each have one vote.

Banks can raise capital by selling more stock.

Because they can't issue stock or bonds, the only way for credit unions to raise capital is by retaining earnings. Because they are nonprofit cooperatives, they don't pay income taxes, but do pay property tax and employment taxes. (Federal credit unions don't pay sales tax, but in most states, state chartered credit unions do.)

Credit unions are subject to almost all of the same consumer protection regulations as banks. CRA is the only exception, and that's because CUs are limited to a specified field of membership. Credit unions are also much more limited in the types of activities they can engage in. Credit unions don't have trust powers, are severely restricted in the types and amount of business loans they can make, and in the types of investments they can make.

So I would disagree (respectfully ) with GenerousLife. While CUs and banks serve some of the same depositors and borrowers, I don't think it's an "unlevel" playing field. They're really on different fields altogether.

Very succintly put rainman. I like it...but I smell a controversial thread coming on!

There's a third breed of cat that is also owned by its depositors, but pays taxes. It's the mutual savings bank.

Good point. In most states, MSBs can raise capital, and there are some other differences in ownership/control issues and powers, but you're right - they are owned by the depositors and do pay taxes.

There's also a fourth breed of cat: a bank organized as a subchapter S corp. It's owned by stockholders but pays no income taxes at the corporate level . . . only at the owner level.

Very good description of a Credit Union. I use to be a Credit Union Examiner, and one thing I will always remember was a credit union that had an excess of retained earnings. Guess what, they were required to return those earnings to borrowing members as a rebate on interest charged on loans. How many banks and mutual savings banks do you know of that rebate interest income to its borrowers? Also what difference is it going to make if you tax a non profit organization's income, if they do not have income to tax?

Credit unions are subject to almost all of the same consumer protection regulations as banks. CRA is the only exception, and that's because CUs are limited to a specified field of membership.

Well let's just cover that a bit more. CU's are not covered by CRA (A regulation that requires that financial institutions provide loans, investments and services to ALL populations and geographies, including low and moderate income groups) not because of the small groups they're supposed to be serving, but because when CU's were originally developed, they had promised to serve primarily Low and Moderate Income people (ie the working class).

Now a days, CU's serve anyone. One of the largest in the nation serves primarily HIGH income people, completely ignoring the original intent that they serve Low and moderate income people. This is part of the "level playing field" issue that bank's bring up.

I am not allowed to "red line" (draw a line around a poor community and say "I won't bank there because these people are too poor") but a CU actually can.

Many CU's make a great deal of money. THe funds often do get returned to shareholders, but they also get returned to their senior management in the form of huge salaries, 1st class tickets (I fly coach) etc. Those of us who feel this is wrong would like to see a CRA test applied to CU's. If they're meeting the original intent (which would be shown through a positive exam outcome) they would be fine, but for those who are not, they should be placed in the same group as us, taxes and CRA included!