The U.S. government threw Silicon Valley Bank depositors a lifeline earlier this week, but bank depositors know that Uncle Sam likely won’t be so generous the next time a bank fails.
Now, it’s up to banking consumers to lay the foundation for a safe deposit experience. That outlook has depositors mulling over a new reality – are credit unions a better bet to protect their cash?
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Up until the SVB debacle showed up on consumers’ radar screens, the public perception of the two financial institutions landed squarely in favor of banks.
According to the American Customer Satisfaction Index, credit unions are generally falling out of favor with the U.S. public.
“Credit unions continue a long, slow decline in member satisfaction that is now in its fifth consecutive year,” says ACSI director of research emeritus Forrest Morgeson. “Rapid membership growth fueled by the pandemic and ongoing industry consolidation may be leaving customer service behind. And members appear to be noticing. Banks now excel in most areas of the customer experience, save the credit union industry’s traditional area of strength: in-person service.”
While banking consumers certainly prioritize quality customer service, they’re not exactly rallying around the possibility of losing deposits beyond the FDIC’s $250,000 insurance guarantee. That could bode well for credit unions.
“Credit Unions offer a member-focused approach, versus a shareholder approach,” said Alliant Credit Union director of payments Chris Moore. “As a not-for-profit entity, our members are our shareholders.”
On the question of who does a better job protecting depositors, Moore said credit unions, “hands-down.”
“Not only do credit unions historically offer better rates and fewer fees, customers typically find more attentive customer service because credit unions operate as non-profits and prioritize their member's financial well-being above all else - and not external investors and stakeholders like traditional banks.”
Structurally, credit unions offer similar deposit protection to banks.
“Just like FDIC insurance, National Credit Union Administration NCUA insurance is backed by the United States government, covering an individual’s deposit accounts at a credit union up to $250,000,” Moore said. “No member of a federally insured credit union has ever lost one penny of insured savings.”
Pros and Cons
What do banks offer that credit unions may not – and vice-versa? Here’s a capsule look at the “pros and cons” from Fiona board advisor and financial planner Bill Ryze.
For Banks
Flexibility. Banks offer more financial services and products, including financial advisory services and investment accounts. “At the same time, credit unions have less offerings and majorly only offer deposit accounts, loans, and credit cards,” Ryze said.
Advanced banking options. Most banks are technologically advanced and offer online banking options, which make it easy to transact and access your account, including apps.
“Although some credit unions have online banking services, they barely have apps, and the quality of these apps is likely to fail occasionally,” Ryze noted.
Accessibility. Banks are easily accessible as they have physical branches nationwide and ATMs, should you need any service.
For Credit Unions
Better loan rates. Credit unions are formed to benefit the members, not solely for profit. “So, the members get better loan terms-lower rates and lower fees,” Ryze said.
Distribution of profits. A credit union is member-driven, and the profit they make is distributed among the shareholders. “Banks, on the other hand, are profit-driven, and the profit they make is not returned to the customers,” Ryze noted.
Better customer service. Credit unions are devoted to their members and not investors, and thus, they provide competitive customer service.
“Members get personalized attention, largely because credit unions have fewer members relative to banks and their customers,” he added.
A Matter of Choice
As the ASCI data indicates, banks have a lot going for them – and that makes the decision to use either banks or credit unions even more difficult.
“If you want branches on lots of street corners in major metro areas, a bank is probably your best bet,” said Bankrate senior analyst Ted Rossman. “Credit unions tend to rank better on service – especially that classic small-town feel. Credit unions often have better rates, too, since they’re designed to serve their members rather than shareholders.”
When choosing between a bank or a credit union, it’s worth shopping around and including both in your search.
“Generally speaking, credit unions and smaller banks tend to offer the most attractive deposit rates,” Rossman told TheStreet. “The largest banks tend to offer very low savings rates, although sometimes they do better on CDs and certain online-only accounts (especially those outside their traditional geographic footprints).”
“Much of the time, the best savings rates come from online-only financial institutions that compete on rates rather than branch footprints or national advertising campaigns,” he added.
Asset Protection Matters
Given the blowback from the Silicon Valley Bank implosion, it’s no wonder that asset protection is emerging as the biggest priority for banking customers – especially well-heeled ones.
That’s why both banks and credit unions go to great lengths to insure deposits.
“I’d be equally confident in banks and credit unions provided they have adequate insurance,” Rossman said. “In both cases, depositors are eligible for up to $250,000 in coverage per depositor per ownership category.”
Theoretically, spousal financial consumers could get up to $1 million in coverage per institution if your spouse has a joint account ($250,000 x two spouses) and each has an individual account ($250,000 apiece).”
“So as long as my $500,000 were at an FDIC-insured bank or an NCUA-insured credit union and was held in an account that was fully protected (such as a joint savings account with my wife), then I’d be equally confident in a bank and a credit union,” Rossman said.
Investing large amounts of cash also depends on a customer’s outlook on risk and equity.
“Credit unions are almost always run more conservatively than commercial banks,” said Kinecta Federal Credit Union CEO Keith Sultemeier. “Without a mandate to maximize profits, we have little incentive to make large, risky investments or engage in risky business practices that may generate large returns.”
“Our members are more Main Street than Wall Street,” Sultemeier noted. “We aren’t exposed to the preferences of a few large depositors or investors.”
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