Credit unions are another legal financial alternative for those who want to get a loan
When you are drowning in debts, you either sink or swim, but anyway you’re mostly on your own in this. Banks are not always a good place to resort to when in need of some extra money. Credit unions are another legal financial alternative for those who want to get a loan. With a penetration rate of just under 10% globally, these organizations have been making a great impact in promoting financial inclusion for over 150 years now. Therefore, PaySpace Magazine Global has decided to tell you all about the credit unions’ role in the world of finance.
Some history and facts
One day people got tired of the banks’ monopoly on the lending field and decided to join efforts. First financial cooperatives united local communities and gave a chance to even their poor members. The first official credit unions were founded in Germany in 1849 to save poor urban workers from resorting to loan sharks for financial help. In 1900, Canadian citizens also organized a credit union in Quebec. The reasons were the same. People were poor, interest rates were soaring, and credit unions became a great solution. Many European countries and the USA soon joined the team. In the 1930s US representatives of the credit union movement, first acknowledged the need to organize credit unions under federal law. Legal regulations made members’ deposits safer.
Many of us are still backing away from their dreams, because it costs too much and the credit products offered will make you pay back at least twice as much as you initially borrowed. Other banking products aren’t always satisfactory too. In 2017, around 23% of banking customers admitted they were not satisfied with their current bank, and more were considering switching bank brands. Neobanks and fintechs have made the market more competitive today, but they didn’t make people feel better about banking. On the contrary, overall customer satisfaction with retail banks tends to decline as customers transition away from in-branch and to digital-only banking relationships. It seems people still want some personal touches. Well, credit unions may have even fewer brick-and-mortar locations than most banks, but their concept of the common ground creates a special atmosphere of genuine care. These financial institutions disrupted traditional banking back in the 19th century, and they continue to perform their function today.
What is a credit union?
Credit institutions are created, owned, and operated by their members. Such cooperatives are financed by a group of people who invest in the organization. They become shareholders and lend money from their joint fund to each other. The difference from other financial organizations is that credit unions are co-owned by the people who use their services and not by external shareholders or investors. Some business organizations form private unions for their employees exclusively, while others are open to outsiders. Whether large or small, technically, they are not-for-profit enterprises that are exempt from taxes.
When the concept emerged, membership in a credit union was limited to people who were familiar with each other. Hence, initially, all union members had something in common, like working in the same industry, for the same company, or living in the same community. However, later many credit unions have eased up their membership restrictions, becoming open to the general public.
Credit unions have a proven track record across the world. By most recent estimations, 274 million people are credit union members in 118 different countries across 6 continents.
Credit unions offer a range of personal and business banking services to help customers meet their financial needs. They mostly provide the same basic services and products as banks do, such as:
- credit lines,
- chequing and savings accounts,
- auto loans,
- electronic banking,
- debit/credit cards,
- investing opportunities,
- safe deposit box rentals,
- money transfers,
- mobile banking and mobile wallets,
- direct deposits,
- insurance products,
- cash ISAs.
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In general, there is a great diversity of service and access points that different credit unions offer, to meet the different range of consumer preferences and expectations. Anyway, the emphasis is always on providing the best service to members – not maximizing profits. Many credit unions also provide personal services to their members and help them develop their financial literacy and money management skills.
Are credit unions safe?
Some people are appalled by the name and not-for-profit status of a credit union. They believe they may not be as safe as traditional banking services, or even confuse them with some private lending organizations that have predatory practices. In fact, credit unions are legal and secure.
In the USA, these organizations are insured by the National Credit Union Administration (NCUA) which is a national government agency that regulates and supervises credit union activities. This regulation makes financial cooperatives just as safe as banks that are federally insured by the FDIC.
In the UK, credit unions are covered by the Financial Services Compensation Scheme (FSCS), which protects savings up to £85,000 – which covers almost 98% of all customers. Moreover, this is the same protection program that covers money stored with banks and building societies. Therefore, even if a credit union collapses, the vast majority of members will get their money back within a week.
Today, credit unions successfully function in a number of European countries including the Republic of Ireland, Estonia, Romania, Poland, Bulgaria, the United Kingdom, and the Republic of North Macedonia. Over 85,400 credit unions currently operate worldwide. In some countries, credit unions are called differently. In Afghanistan, for example, credit unions are called Islamic investment and finance cooperatives (IIFCs). In Africa, they are known as savings and credit co-operative societies (SACCOs).
At the international level, credit unions are represented by the World Council of Credit Unions, which provides technical assistance to strengthen credit unions’ financial performance and increase their outreach. The Council also represents the interests of the global credit union system before international organizations and works with national governments to improve legislation and regulation in this sphere.
How do credit unions function?
The ownership and decision-making in credit unions are based on democratic principles. Each member has the right to vote and everyone’s vote is equivalent. Unlike the shareholders within a private organization, there are no major owners who decide everything. A one-member, one-vote system works here instead. A volunteer board of directors is elected by members to manage daily operations. To use credit union services, you have to obtain membership first. Whereas even with the most customer-oriented banks you don’t have a say about fees and terms, being a part-owner empowers union members to make the most of their finances.
Most unions are still locally-based with a “common bond” uniting members eager to lend to each other. Excess earnings are not given to a corporate owner, but are used to offer members more affordable loan rates, a higher return on savings, or lower fees for other products. In this way, profits are re-distributed to bring benefits to credit union members. This often allows them to offer competitive low-cost products with great flexibility of terms and favorable savings rates.
Credit unions are especially popular among the low-income population and remote regions where they are promoting financial inclusion. In particular, they will be important for marginal groups living in rural areas, where people have limited access to financial services but want to develop their farming and agricultural business. According to the Microfinance Centre study, the predominant part of microfinance institutions in Central and Eastern Europe and the post-communist independent states, are credit unions.
The services provided differ depending on the needs of a local community. Some credit unions prefer to test their members with handling a savings account before asking for a loan, but others don’t set such limitations. Interest rates can vary but are usually quite comfortable.
Some credit unions offer additional benefits to their members. For instance, in the UK, the Treasury has teamed up with 15 credit unions across the country to launch a new “PrizeSaver” scheme. Thus, savers who stick as little as £1 into a savings account could win up to £5,000 monthly in a new lottery draw. A further 20 smaller prizes of £20 are also awarded. The prize will be deposited into the winner’s credit account.