More than 75% of U.S. consumers use financing to purchase a new car. The vehicle they can afford may depend on the lender they choose. Credit: Prostockstudio|Dreamstime.com.
A prospective car buyer and a family saving for a home down payment may have something in common: better rates from a credit union than commercial bank. Jordan van Rijn has long been interested in the reasons for these and other differences between the two types of financial institutions.
“During my training in development economics, I studied cooperative microfinance organizations in Latin America and noticed some similarities with U.S. credit unions,” says van Rijn (AAE PhD ’19), a teaching professor and faculty affiliate at the UW Center for Cooperatives. “That sparked my interest in analyzing their unique features from an economist’s perspective.”
An estimated 412 million share-owning members are part of a global network of 67,000 credit unions (CUs) in 101 countries. The U.S. network—about 4,300 CUs with 145 million members—is the world’s largest, but CUs also have a strong presence in Canada, Australia and Europe. Cooperative financial institutions formed in Europe in the 1850s and reached the U.S. in the early 1900s. Their original members were poor- and middle-class workers, including immigrants who pooled resources to help each other build new lives.
While U.S. banks and CUs look very similar from the outside today—imposing pillared buildings with suit-wearing loan officers—two structural features distinguish them: First, CUs are member-owned coops while commercial banks are for-profit corporations owned by shareholders who provide equity capital and receive dividends. Second, CUs are nonprofit organizations that emphasize long-term financial sustainability and member well-being while most banks focus on profit maximization for shareholders.
These differences directly impact governance: CU members are eligible to vote in democratic elections for a board of directors whose volunteer members hire executives to manage operations. All CU members have one vote, regardless of their deposit size. In contrast, bank customers do not participate in operational decision-making since only shareholders elect the board of directors. Stock ownership may shape a shareholder’s influence on business operations, and financial incentives for executives are more closely tied to bank profits.
Practical consumer benefits resulting from these structural differences include higher savings yields and lower rates for consumer loans. For example, van Rijn’s analysis of 2001-2019 auto loan data showed that CU members saved an average of $84 per year for new cars and $118 for used cars, compared to bank customers with similar income, credit history and demographic features. Differences in home mortgage rates are smaller due to federal regulations, but absolute savings can still be substantial.
Since federal regulations cap commercial lending at 12.25% of CU assets, this sector has traditionally been dominated by banks. However, CUs are less likely than banks to close branches with lower profit margins and more likely to open and retain them in low-income and ethnically diverse areas. This can increase approval rates for small-business loans in underserved populations. Instead of relying on the applicant’s credit score alone, branch visits allow loan officers to consider “soft information” from personal conversations about business plans and collateral.
Beyond practical advantages for consumers, the presence of CUs in the U.S. financial system also has broader societal benefits. More cautious lending practices from prioritizing long-term sustainability over short-term profit maximization have helped CUs weather financial crises better than banks. During and after the 2008 Great Recession, for example, the proportion of delinquent mortgages was more than three-fold and the number of failures more than five-fold lower at CUs than banks.
Despite a major consolidation of the financial sector since the 1980s, the 1997 Credit Union Membership Access Act has maintained market competition and consumer choice. CU membership was originally limited to specific church congregations or single professional groups, such as farmers, firefighters or teachers. The 1997 federal law gave CUs the option to either include multiple occupations or convert to community charters, which made all residents in a defined geographic region eligible for membership.
“More than 1,000 credit unions diversified their membership by switching to community charters, and several hundreds added new employee groups,” says van Rijn. The average number of CU members grew from 4,500 in 1991 to 24,100 in 2021, which increased average returns on CU investment without greater risk-taking.
Unlike their Canadian and Australian counterparts, U.S. credit unions have maintained their nonprofit status, making them exempt from the corporate income tax. This, notes van Rijn, has long been a point of contention, but studies have shown that CUs pass along the tax exemption benefits to their members. For example, he estimated an aggregate $4.3 billion savings for CU members for 2019 auto loans alone, more than twice the tax exemption value of about $2.0 billion that year.
“I believe credit unions fill a unique niche by providing not only practical advantages for consumers but also larger societal benefits,” says van Rijn. “These are strong arguments for regulators and policymakers to maintain credit unions as complementary and distinct elements of the U.S. financial system.”