Credit Unions a viable alternative

17:00, May 07 2013
piggy bank
CREDIT UNIONS: Would you sit up and take notice if there was a viable alternative to the main banks?

The Aussie-owned banks are currently reporting another round of bumper profits and there'll be plenty of dividend cash flowing back across the Tasman to line shareholders' pockets.

But imagine if there was a bank that was more interested in helping you get ahead than screwing every last dollar out of you.

Imagine if instead of stinging you with rapacious fees, it had low fees - or no fees at all.

Imagine if it ploughed all its profits into making its services cheaper, or gave them back to you as a dividend.

This isn't some crazy pipe dream.

Credit unions keep a low profile and don't get much press. But the movement has been creeping along in the background for more than 50 years.


The services that credit unions provide are essentially the same as a small bank.

The real difference is the way they operate.

Credit unions are collectively owned. Each member gets one vote, regardless of how much they have invested. Any member can run for elections to become a director.

Profits are distributed back to members through lower fees, better interest rates, a dividend, or some combination of all three.

Most credit unions fall under the umbrella of the New Zealand Association of Credit Unions. Chief executive Henry Lynch says the movement has its roots in community groups or industrial organisations with a "common bond".

While membership in the likes of the Fisher & Paykel Credit Union is still restricted to past and present employees, the community groups are now open to all kiwis, regardless of where you hail from.

In some countries like Canada, credit unions are cutting the banks' lunch with more than a third of market share.  

In New Zealand, they're becoming a force to be reckoned with, with more than 200,000 customers and a network of 95 branches although that's still only a small market share compared to the big four retail banks.

Deciding who to trust your money and finances with is a big call. While credit unions sound great at first blush, but they're not without flaws.

We've put them toe-to-toe against the big banks in a David vs Goliath battle to see how they stack up.

Round 1: Deposits

"You'll notice our deposit saving rates are generally higher than most of the banks," says Lynch.

He's right. This table of deposit rates shows you can earn 4.75 per cent on a one-year term deposit with Credit Union Aotearoa or First Credit Union, compared to the best big bank rate of 4.2 per cent with the BNZ.

A two-year deposit nets you the same 4.2 per cent or so at the big banks, but you can get 5 per cent with the Auckland Credit Union or 6 per cent with Credit Union Aotearoa.

Round one goes to the credit unions.

Round 2: Personal loans  

Personal loans are credit unions' bread and butter, so round two is also an easy win.

Credit unions offer better deals across the board. The cheapest secured loans start from 12 per cent, or even lower with the Police Credit Union's 9.5 per cent. 

That compares to ASB's 14.95 per cent, and Westpac's 16.25 per cent.

The cheapest unsecured loans start from 13 per cent, compared to 16.95 per cent with ANZ, the cheapest of the big banks.

Round 3: Mortgages  

The banks are on the ropes already, but here's where they start fighting back.

Credit unions source all their loan money from local depositors, and don't really have the heft to get into the big wholesale money markets.

Massey University banking expert David Tripe says that means they generally find it difficult to compete in the retail mortgage market.

"They're not wildly uncompetitive, but they aren't in a position to price as sharply as the banks are."

NZACU includes four member building societies, which are similar to credit unions except with a focus on mortgages.

The largest and oldest of those, the Nelson Building Society, has a floating 6.45 per cent interest rate, and short-term fixed rates also around the 6 per cent mark.

That's a whole percentage point more expensive than some of the sweetest bank deals, like BNZ's 4.95 per cent one-year mortgage rate.

Credit union and building society mortgages are generally priced in the same ballpark as the banks, but they're not quite in the top league.

Round 4: Risks

Not all credit unions have a credit rating, but those that do are usually graded around "BB". Technically, that translates to a one in 10 chance of an investor not receiving payment on time and in full over a 5-year period.

In practice, it's not that simple.

"[Credit unions] are not actually much different from the smaller banks in many cases," says Tripe.

Size is important. Tripe says credit unions get punished for not having the scale to be able to spread risks around as much as the big players.

But without shareholders clamouring for dividends, credit unions have actually tended to be stable.

"During the GFC [global financial crisis], no credit union went bust or asked for a government handout," says Lynch.

He says credit unions' two layers of trustees means they are actually more closely supervised than any bank.

Then there's the different lending practices. "It's a very conservative organisation," says Lynch. 

Unlike finance companies, credit unions are not allowed to get involved in commercial property or glitzy developments.

"All we're interested in doing is helping mum-and-dad kiwis, and where possible, small to medium enterprises," says Lynch.

Nevertheless, the big trading banks' scale gives them an indisputable advantage, so they win this round.


Round 5: Product range

Credit unions offer a surprisingly broad range of products and services.

"We offer exactly the same as a small retail bank would - internet banking, phone banking, loans, saving accounts, ATMs, debit cards," says Lynch.

They don't have the depth of the big banks, but all the basics are there.

The major limitation is that current regulation means only a 'natural person' can join a credit union. That prevents businesses from borrowing or lending money to a credit union, except indirectly in some cases.

The industry is fighting to cut through that particular bit of red tape, but for now it's three-two to the banks.

Round 6: Service 

This is where credit unions really shine.

"What's unique is that when you walk into a credit union branch, the staff believe in the ethos of people helping people," says Lynch.

If you get into financial strife, credit unions will sit down with you, go and see government bodies on your behalf, and negotiate with creditors.

There's a strong culture of thrift and saving.

"It's old-fashioned values that have come back into vogue," says Lynch.

He says credit unions are required by law to help improve financial literacy, and treat the responsibility seriously.

"That's part of our mandate. You do the right thing by the member."

Lynch says the people-first culture is what pushes credit unions higher than banks in customer satisfaction surveys.

The credit unions undoubtedly win this round, leaving us tied at three-all.

It's a split decision. Clearly, credit unions are not going to be appropriate for everyone.

But if you're looking for a good way to save some money - and really stick it to the Aussie banks - it might be worth considering.


Ngaire Holmes has been with the Hamilton branch of the First Credit Union for more than two decades, and she's never looked back.

The 61-year-old office manager says it's "the fact that you're a person, not a number" that converted her from the big banking corporations.

She and her husband Gary wanted to build a house when they shifted to Hamilton, and made enquiries about joining the credit union.

"They were just fantastic," she says.

Holmes pays no fees on any of her accounts, and has only paid minimal fees in the past.

But she says it's the service that makes all the difference.

She can call up her branch any time and drop in for a one-on-one chat with whoever she needs to speak to.

"I can say this from my heart - they are so friendly, they are genuine people."