When it comes to saving, borrowing, or lending money, most Canadians think of “Banks.” After all, institutions like TD, Scotiabank, BMO, RBC and CIBC have a significant national presences with lots of options in terms of wealth management, financing, and investments.

However, banks aren’t the only option for seeking financial help. In fact, credit unions, also known as financial co-operatives, are similar institutions providing nearly the same kinds of services offered by full-fledged conventional banks.

But what are credit unions, and how do they compare with banks? In this article, we’ll provide an in-depth understanding of Canada Credit Union vs. Banks.

Let’s get started!

Credit Unions and Banks: A Brief Overview

Both banks and credit unions are financial intermediaries connecting borrowers with lenders. The primary role of both these institutions is to match individuals with surplus money with borrowers looking for financing.

These institutions usually make money by charging an interest rate spread between both parties involved. While it seems that credit unions and banks provide the same services, they are, however, quite different in reality.

Credit union services are exclusive to a local region or a community. These unions are owned by members, and only the union’s members can avail of the services of the institution. On the flip side, banks are owned by shareholders, and they serve customers instead of members. Moreover, banks usually provide services to anyone in Canada. That’s one of the primary differences between credit unions and banks.

Some examples of credit unions in Canada include:

• Meridian Credit Union (Location: Ontario)
• Affinity Credit Union (Location: Saskatoon and Regina)
• Connect First Credit Union (Location: Central and Southern Alberta)

Let’s now uncover more differences between these two.

Differences between Credit Unions and Banks in Canada

Till now, you might be able to distinguish between credit unions and banks. However, they have differences in terms of regulations, fees, scale, and ownership. Let’s talk about them.

Ownership Structure

One basic difference between credit unions and banks lies in their underlying purpose. Banks are for-profit organizations operating in the interest of their shareholders. In contrast, credit unions are not-for-profit organizations working in the interest of their members.

What does it mean? Well, the profit earned by a bank is distributed amongst the shareholders as dividends. However, the profit is reinvested in the institution in the case of a credit union.

Moreover, credit unions are open to residents of a local area or a particular profession. Plus, you need to become a member to use the union’s services. But how can you become one?

All you need to do is purchase a share of the union, which may cost as low as $5. The share entitles you as a part-owner of the union, and you have voting rights to influence the Board of Directors ( BODs) decisions.

In contrast, a bank is open to every Canadian resident, and you don’t need to purchase a share or something similar along the lines to use banking services. However, you’re treated as a customer instead of a member/owner in the case of banks.

Regulatory Compliance

Canadian Banks are federally regulated by the Office of the Superintendent of Financial Institutions (OSFI).  Such as, UNI financial cooperation, and Coast Capital Saving Federal Credit Union.

However, credit unions are, in most cases, provincially regulated. The provincial government is responsible for designing laws to permit regional credit unions how to lend, borrow, or save. They are regulated by the Financial Services Regulatory Authority of Ontario (FSRA) Furthermore, all credit unions are governed by the Bank Act.

One important point to note is that a provincial credit union serves a small portion of the population, while a federally-regulated Credit union is open to all Canadians.

On the flip side, Big banks are federally-regulated and are also legislated by the Bank Act in Canada. Plus, the Bank of Canada (Canada’s Central Bank) also uses Banks as tools to stimulate the economy. For example, if the Bank of Canada wants to boost the economy, it’ll ask the banks to reduce their cash reserves to lend more and vice versa.

Stress Tests

Stress Tests are a federal rule designed for federally-regulated financial institutions in Canada. These tests are ways to evaluate an individual for a mortgage loan application, and they are mandatory requirements for every bank.

Furthermore, if you apply for a mortgage from a federally-regulated credit union, as mentioned earlier, a stress test is still necessary. Fortunately, this requirement isn’t mandatory for provincially-regulated credit unions.

Provincial-level credit unions still use stress tests, but it’s just a way to evaluate mortgage applications. It’s not a hard benchmark, and even if an individual fails a stress test, they might still qualify for a mortgage loan in a provincial-regulated credit union.

Technology Adoption

Large banks usually adapt to the latest technologies to offer convenient services to their customers. Some common examples include banking applications and mobile banking.

However, the same might not be true for credit unions. Small local credit unions especially can’t invest in advanced financial technologies. However, there are still several credit unions that provide a similar level of innovation, if not better, as compared to banks.

Fees and Interest Rates

Banks generally charge higher fees in terms of interest and checking account charges.

Credit unions, on the other hand, are popular for charging lower fees. In fact, some of them don’t even charge for a checking account. Plus, credit unions have low interest and higher saving rates. But why is that?

Credit unions operate for the benefit of their members, and since only the members utilize their services, these institutions have no intention to earn profit. Even if there’s a profit, it’s redistributed among the members. Therefore, this enables credit unions to charge lower fees.

In addition, credit unions are part of THE EXCHANGE Network, which allows any member to withdraw money from another union’s ATM at no cost whatsoever.

Size and Scale

Canadian banks usually have a huge branch network spread across the region. On the other hand, credit unions have a localized presence with few branches. Banks are also larger and have huge resources as compared to credit unions. This is why we see credit unions are unable to offer certain financial products or access different markets.

Similarities between Credit Unions and Banks

You might have a clear picture now of how banks and credit unions are different. However, there are several cases where both institutions are indistinguishable.

Safety

Both banks and credit unions are covered by the Canada Deposit Insurance Corporation (CDIC). This means that the customer’s deposits are insured and protected up to $100,000. However, this is only applicable to the federally-regulated credit unions.

The provincially-regulated credit unions aren’t secured by CDIC, but there’s coverage at the provincial level. For example, the Financial Services Regulatory Authority of Ontario (FSRA) protects deposits for up to:

• $250,000 for unregistered accounts
• Unlimited coverage for registered accounts

Federal Regulation

Both credit unions and banks are legislated by the Bank Act. However, credit unions are usually overseen by the provincial government, whereas banks, especially RBC, TD, CIBC, BMO, and Scotiabank, are largely regulated by the federal government. 

Banking Services

Both banks and credit unions offer checking and saving accounts as well as debit/credit cards. Similarly, RRSP and TFSA investment account options are also available at both financial inclusions.

Plus, you can even find the common loan types, including mortgage, line of credit, and personal loan, at both these institutions.

What’s different is that banks may offer additional financial products, including bridge financing and reverse mortgages, which aren’t always available at credit unions.

Credit Unions vs. Banks Canada: Summing it Up

Credit unions and banks are both important institutions tasked with boosting the financial inclusion of an economy. If you want to benefit from a low-interest rate, credit unions can be a good choice. However, do know that credit unions aren’t open to everyone.

Similarly, if you want to diversify and choose from a wide range of financial products, banks should be your choice.

Frequently Asked Questions (FAQs)

Are Banks Better than Credit Unions?

Both banks and credit unions are two different forms of financial institutions. There are several features that make Banks better, and the same is true for credit unions.

Banks are better than credit unions in terms of technology adaptation, customer service, and the range of financial products being offered.

What are the Pros and Cons of a Bank vs. Credit Union?

The pros of a bank include better customer service and a wide range of product offerings. Moreover, banks are large and have multiple branches. The cons of banks include higher interest costs and strict standards for loan qualifications.

The reverse is true for credit unions. For example, credit unions offer better fees, but their con is that they only serve a small local region.

References:

• https://wowa.ca/credit-union-vs-bank
• https://loanscanada.ca/money/the-difference-between-a-bank-and-a-credit-union-in-canada/?utm_source=google&utm_medium=cpc&utm_term=&utm_campaign=19605244970&utm_content=&utm_ad_placement=&utm_adgroup=&gclid=Cj0KCQjwuLShBhC_ARIsAFod4fKbxLwGWSpN1I7uFf1QHf60XR0cvwMf0RHcNVserRKlu91jtpVcmQYaAqxdEALw_wcB
• https://www.mydoh.ca/learn/money-101/money-basics/banks-vs-credit-unions-what-is-the-difference/#:~:text=They%20can%20serve%20anyone%20across,range%20of%20services%20and%20products.

https://www.nerdwallet.com/ca/banking/what-is-a-credit-union