The big bank backlash! Why more and more Americans are flocking to credit unions after growing tired of endless branch closures and low interest rates offered by biggest US banks

Fed-up Americans are fleeing major banks in favor of credit unions after becoming tired of low interest rates and dwindling branch numbers.

Some 1,500 traditional bank branches closed across the US last year as part of an ongoing and industry-wide cost-cutting strategy, driven largely by the rise of internet banking.

But the country's credit unions expanded their brick-and-mortar presence. Over the same period, the total number of federally-insured credit union branches increased by over 50, according to data from National Credit Union Association (NCUA)

As it stands, some 4,800 credit unions cater to 135 million Americans and operate around 20,700 branches across the country. That is 500 more than there were a decade ago.

Credit unions are therefore bucking a trend plaguing commercial real estate, as companies give up their offices due to remote work and retailers close downtown stores in favor of online shopping.

While the number of bank branches has steadily declined over the last decade, the number of credit union branches has increased

Credit unions started by offering financial services to a specific region or community, and its members would have some 'common bond'. That has since changed

What's more credit unions offer much better savings yields - at a time when America's biggest banks have come under fire for not passing on higher interest rates to their customers.

As of December 2023, the average credit union offered a 3.2 percent rate on a one-year Certificate of Deposit (CD) account. By comparison, the average rate offered by major banks was just 2.23 percent, according to the NCUA.

It means savers with a $10,000 deposit stand to make an extra $100 in just one year from a credit union than a mainstream bank. 

'Where banks closed branches, we like to go in and open a credit union,' said Bruce Adams, president and CEO of the Credit Union League of Connecticut.

'We're designed for underserved and overlooked populations, helping people achieve financial independence and putting the profits back into the membership,' he added.

How is a credit union different from a bank?

Credit unions and banks have a lot in common since they both hold and lend out money. 

'On the surface, credit unions are essentially the same as banks,' said Adams.

Both offer bread-and-butter financial services like checking accounts, credit cards, auto loans and mortgages.

They also both offer $250,000 of federal insurance on deposits. The only difference is that credit unions are protected by the National Credit Union Administration (NCUA) as opposed to the Federal Deposit Insurance Corporation (FDIC).

What makes them unique from banks is that they are 'not-for-profit' institutions.  That not only means they do not have to feed profits to shareholders, but they also enjoy a tax-exempt status, lowering their costs substantially.

Additional earnings can therefore be given back to members in the form of lower rates on deposits and cheaper loans.

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Some 1,500 traditional bank branches closed across the US last year as part of an ongoing and industry-wide cost-cutting strategy, driven largely by the rise of internet banking

History of credit unions

The first credit unions cropped up in Germany during in the mid-19th century.

Originally, the idea was that a group of people working at the same factory or attending the same church, for example, could pool together their funds for additional buying power and to avoid having to borrow from loan sharks.

Over the next decades they started to spread through much of Europe and eventually the concept reached Quebec, before spreading south into the United States.

In 1909, St. Mary's Bank in New Hampshire, Massachusetts, became the first credit union in the country. It was established to help French migrant mill workers and their families save and borrow money.

Their accumulated savings were initially held in a safe in the home of it's first president. From there, they were lent to members to build homes, businesses and meet the general financial needs of the community.

A credit union's charter will usually identify some 'common bond' between the members, but in the US most credit unions arose to serve those working for a single employer.

Many such legacy credit unions are still around today. For example, Lockheed Martin has spawned multiple credit unions, including LM Federal and Logix - founded in 1937 as the Lockheed Aircraft Employees Federal Credit Union.

St. Mary's Bank in Manchester, New Hampshire, was the first credit union in the country

In 1970, the perceived security of credit unions grew stronger when the National Credit Union Share Insurance Fund was established. Over the next decade the total number of insured credit unions in the US tripled.

Then, in the early 2000s, credit unions started operating with increasingly loose eligibility requirements after the National Credit Union Administration started approving what are known as community and associational charters.

They meant that instead of well-defined common bonds, for example that all members were employees of New York City or Fort Benning military base, they could instead have more flimsy connections.

The largest credit union in Seattle was originally established for Boeing employees but it's now called BECU and anyone who lives, works, studies, or goes to church in Washington State can qualify for membership.

Nowadays, almost all credit unions, regardless of their origins, have more relaxed rules about members. They might only require living in a certain area or paying a small one-off fee to join a specific association.

What are the advantages of a credit union?

Fans will say credit unions offer more personal relationships for their clients. They are especially popular among small businesses. 

'One territory credit unions can claim is banking relationships,' said Adams. 'As banks have gotten larger and larger, they've gotten more and more impersonal.

'In many cases these are the institutions our parents and grandparents grew up with. That's sort of uniquely American and uniquely special.'

Since many credit unions strive to maintain personal relationships with members and their families, they are often better equipped to give personal and tailored financial advice.

That could cover anything from how to fund the purchase of a new home, a child's college education or an unexpected hospital bill.

Credit unions have captured an increasing share of the auto loan market by offering better rates than most banks and specialized auto manufactures' lenders

The Golden 1 Center in Sacramento, California, named after the Golden 1 credit union

Since credit unions are not taxed and don't need to generate profits, they also tend to offer better savings rates and lower loan rates.

In recent years, credit unions have been able to capture the largest share of the auto loan market because they undercut banks and specialized auto manufactures' lenders with lower rates.

'They kept rates low when the rest of the market just exploded,' John Toohig, head of whole-loan trading at Raymond James, told the Wall Street Journal in 2022.

At the time, an automotive report from Experian revealed that banks were charging 8.36 percent on used car loans while credit unions offered average rates of just 5.94 percent.

Similarly, credit unions tend to offer higher interest rates on savings accounts than banks.

What are the advantages of a bank?

Unlike many banks, which have networks of branches and ATMs sprawled across the country, most credit unions are only present in a particular region, which can be an inconvenience.

For people expecting to make withdrawals and travel around the country, a credit union might not be a good choice.

And since banks usually have more capital to invest in technology, they tend to have better and more usable apps and online banking portals. That means making transfers and checking balances might be easier and quicker.

Banks may also offer a wider range of services than a typical credit union. For example, those wanting to trade stocks and shares may need to open a brokerage account with a traditional bank.

National banks have networks of branches and ATMs across the country

Credit unions also issue fewer loans to businesses.

'Commercial loans tend to be very expensive to offer. You need a lot of expertise and you need to hire for that, so a lot of credit unions have shied away from them,' said Adams. 

And due to the membership structure of credit unions, many will also have an entry requirement which may or may not be easy to meet.

For example, the Self Reliance New York Federal Credit Union, which offers some of the best Certificate of Deposit rates in the country, is open only to the members of the Selfreliance Association of American Ukrainians.

Eligibility for membership is restricted to those who were born or have parents who were born in Ukraine.

Credit unions are getting bigger

Nonetheless, with the increasingly relaxed requirements to join most credit unions, the principle that members are closely connected by an employer or institution has been eroded.

In the US many are getting increasingly large and starting to behave more and more like big banks. As such, they face growing calls that they should also pay tax.

Golden 1 Credit Union is emblematic of that boom - in 2015 it gave its name to the indoor arena that houses the Sacramento Kings NBA team.

Credit unions in the US are becoming increasingly large and facing calls they should pay tax

Navy Federal Credit Union is the largest in the US in terms of both assets under management and membership

While Americans may have become accustomed to sports arenas taking the name of banks, for a credit union to do so is telling of a broader rise, according to Steven Reider, the founder and president of consulting firm Bancography.

Even though Golden 1 has some $20 billion in assets under its management and more than a million members, it's far from the largest.

Headquartered in Vienna, Virginia, and chartered in 1933, Navy Federal is the biggest credit union in the country with more than 13 million members and $170 million assets under management - significantly more than the average bank.

'Credit unions are branching aggressively and moving into markets and communities national banks vacated,' said Reider. 'I think in terms of just general consumer share they're going to continue to be a significant and meaningful competitive force.'