When you think of financial services in Canada, some big names dominate the landscape. Financial organizations are so concentrated in Canada that the top banks have acquired a nickname, ‘The Big Five’. This includes Scotiabank, TD Canada Trust, Canadian Imperial Bank of Commerce (CIBC), Royal Bank of Canada (RBC), and Bank of Montreal (BMO).
Despite this concentration, there’s another type of financial services institution offering an alternative way to manage your money: your local credit union.
While there’s no disputing the Big Five banks dominate Canada’s financial ecosystem, credit unions have quietly prospered since Alphonse Desjardins opened the first caisses populaires (people’s bank) in Quebec in the early 1900s. Credit unions provide a community-focused approach to day-to-day banking, with emphasis on meeting customers’ needs rather than turning a profit.
There are around 700 credit unions and caisses populaires across the country, with the highest membership in Quebec and the western provinces. Although they offer many of the same services as banks, there are several differences in how credit unions are structured, regulated, and benefit customers.
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What is a credit union?
Credit unions are financial institutions, just like banks, except that their members own them. They are nonprofit organizations with a mandate to serve their members. That means their primary goal is to provide better products and services to their members, not seek a profit.
Since credit unions are not-for-profit, any money they earn is invested back into the organization, issued as dividends to their members, or donated to the community. Credit unions can range dramatically in size, from just a few hundred members in a local community to a large organization with thousands of members. There are many credit unions in the great white north, with a third of our population claiming to be members of a credit union. Credit unions are very popular in Quebec and Western Canada.
How do credit unions work in Canada?
Most credit unions are provincially run, with legislation spelling out how they can lend, borrow, and invest. Provincial corporations or non-government insurers cover deposits. Some are members of the trade group, the Canadian Credit Union Association. Recent legislation paved the way for credit unions to expand and convert to a federal charter, but they’re still member-owned and run as a cooperative.
Major domestic banks are federally regulated by OSFI, an independent government agency that also oversees foreign banks operating in the country, trust companies, fraternal benefit societies, loan companies, and life/property and casualty insurance companies. Bank deposits up to $100,000 are insured by the Canada Deposit Insurance Corporation (CDIC). The Bank Act legislates federal banks and credit unions.
Who can join a credit union?
As long as they have the proper identification, every Canadian citizen has a right to open an account with a federally chartered bank or credit union.
Provincial credit unions have more stringent rules. A credit union may require you to live, work, or attend school in the immediate area; they’re especially popular in small or underserved rural communities. Some cater to specific professions, such as farmers, teachers, or government employees, and may allow you to refer family or friends. To join a credit union, you must meet eligibility requirements and buy a share (usually between $5-$25) to establish membership.
What’s the difference between credit unions and a bank in Canada?
While all credit unions and banks may seem similar, there are some key differences to keep in mind when choosing between the two. Here’s how banks and credit unions differ, and how they are the same.
Organizational structure: Credit unions are financial cooperatives that are locally owned and controlled by their members. They follow the not-for-profit business model, which means profits are either reinvested back into the business, issued as dividends to members, or donated to local charities and community programs. Commercial banks, on the other hand, are large for-profit entities. Their investors don’t have to be bank customers to buy shares, and they’re only interested in the bank’s financial performance.
Electoral structure: A credit union’s board of directors is volunteer-run and elected democratically. Each credit union member gets one vote, regardless of the size of their deposits or investments. Commercial banks, on the other hand, have board members that are elected by shareholders, receive compensation, and don’t have a professional relationship with the bank.
Types of accounts: Like banks, credit unions have physical branches and ATM’s, and you can access the same basic financial products, including chequing and savings accounts. You can open an RRSP or TFSA through a credit union and purchase investments for your future. Because a credit union’s mandate is to help their members first, you may have access to slightly better interest rates.
Web presence: One of the downsides of working with a relatively small organization like a credit union is that their available budget for extras like social media marketing, mobile app design, and even a basic web presence is limited. While most banks offer an easy to use online banking interface that lets you transfer cash between accounts, pay bills, and see your transaction history, many credit union websites and mobile apps are clunky and don’t have modern features like Apple Pay or Google Pay. This is definitely changing, however, and you’ll likely see less difference on this between major banks and credit unions over time.
Customer service: One area credit unions consistently excel in is customer service. Again, this comes from their status as not-for-profit organizations whose focus is on providing a better service to members, versus banks whose responsibility is to their shareholders. Credit unions have ranked ahead of banks in the Ipsos Financial Service Excellence Awards for 14 years running.
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Banking with a credit union vs a bank in Canada
The experience of using a regular bank account vs a credit union account is very similar. Both types of organizations have brick and mortar locations where you can go and do your banking. Both credit unions and banks offer chequing and savings accounts, mortgages, loans and credit products, and investment and retirement products. Depending on which credit union you choose, you may receive a higher interest rate for your savings, or have access to fewer products (for example, some credit unions only offer one or two types of credit cards).
Using your credit union issued debit or credit cards is very similar to a traditional bank, and they are accepted anywhere a traditional debit or credit card might be accepted. You can withdraw cash at a credit union branch, or you can use your bank card at any credit union ATM within The Exchange Network free of charge.
Funnily enough, there’s debate over the language credit unions can use to describe what they do. The Office of the Superintendent of Financial Institutions (OSFI), Canada’s federal banking regulator, backtracked in August after banning credit unions from using the words ‘bank’, ‘banker’, or ‘banking’ to explain their services. The issue is currently under review.
What kind of accounts can you hold at a credit union?
Pretty much the same as a bank: chequing and savings accounts, mortgages, loans and credit products, and investment and retirement products. Depending on which bank and credit union you compare, latter may charge lower banking fees and offer higher interest rates on savings. Members can also use their bank card at any credit union ATM within The Exchange Network free of charge. The tradeoff, however, is that credit unions offer fewer account types and financial products than the big banks.
Getting a mortgage with a credit union vs a bank
Your local credit union offers mortgages to homebuyers just like a regular bank and should have a range of mortgage terms as well as fixed and variable rate mortgages. Once again, credit unions, due to their not-for-profit organizational structure, tend to offer slightly more competitive products, and this is true of mortgage rates as well. While credit unions may have better mortgage rates than banks, there can be downsides to a mortgage with a credit union. For example, credit unions may not have as flexible prepayment terms as the banks. Make sure to get clarification before signing on the dotted line.
Why choose a credit union over a bank?
It depends on your financial needs and where you live. When deciding between a bank and a credit union, consider the products and rates offered, the number and location of branches and ATMs, fee structure, customer service, and online/mobile banking options.
The bottom line
Whether you should opt for a credit union or a bank depends on your financial needs. When making your decision, consider how important the differences are. Is a variety of types of accounts important, or is low fees higher on your priority list? How about the branch locations and ease of access to ATMs? Is excellent customer service essential, or would you forgo that in favour of an easy to use online banking interface? Finally, would you prefer to give your business to an organization that prioritizes their members, or their shareholders?
Both options – credit unions vs regular banks are sound financial choices, and your decision will ultimately come down to your financial needs.