There is a proselytizing feel to the credit-union movement. Believers talk of a “social mission”: to serve communities, not the false gods of the stock market. Today, this creed is winning more converts than ever before. Globally, the number of people in credit unions has doubled since 2000, from 108 million to 217 million. Savings are up by 130% in real terms (see chart, below).
Credit unions first appeared in 19th century Germany. Like banks, they took deposits and made loans. But, crucially, they were owned by their members, who shared a “common bond,” such as a profession or place of residence. Earnings were returned to members in the form of better interest rates.
In Europe, most of these early institutions evolved into cooperative networks, such as DZ Bank in Germany and Rabobank of the Netherlands, which are still owned by members but no longer serve a particular group. Elsewhere, the requirement for a common bond endures: Partners Federal Credit Union, for example, is open only to employees of Walt Disney and their families. Fully 39% of American adults belong to a credit union, up from 36% a decade ago — an increase of 14 million. In Australia, another stronghold, 24% do.
Three forces are driving the growth of credit unions. The first is simple: they offer higher rates than banks to savers and lower rates to borrowers. American credit unions charge an average rate of 2.66% on a three-year used-car loan, against 5.13% for banks, according to SNL Financial, a research company. Credit unions also outscore banks in customer satisfaction surveys in America, Canada, and elsewhere.
A second factor is the financial crisis. Some credit unions failed; “corporate” ones, which pool and reinvest the funds of individual credit unions, were especially badly hit. But, in general, credit unions were more resilient than banks, says a report published in 2013 by the International Labour Organisation. Without the same pressure to chase short-term profit, they took fewer risks. As the big banks were hit by failure and scandal, credit unions presented themselves as a more wholesome alternative. That boosted membership, especially among the young.
The third cause of growth is more lasting, argues Bill Hampel of the Credit Union National Association, an American industry group. In America, legal changes have allowed for multiple “common bonds,” helping credit unions to merge. Big credit unions are now professional operations with nationwide ATM networks and a wide range of products: the Navy Federal Credit Union, which serves American sailors and soldiers, has nearly 6 million members. All this makes credit unions easier to join, and more convenient to use.
This brings them into closer competition with banks. In America, bankers complain loudly about credit unions’ exemption from federal income tax. But even in Australia, where they don’t enjoy the same tax breaks, credit unions still offer competitive rates, according to data from Canstar, a research company. Happily for banks, though, the very thing that makes credit unions different also hampers their growth: they cannot raise equity.
© The Economist Newspaper Limited, London (October 31, 2015)