Consumers often have a few questions about which type of financial institution can best meet their needs. It’s important that as community banks, we have a clear and ready response, because there can be a lot of confusion about the differences between a credit union and a bank.
As President and CEO of ICBM, I want to provide some clarity to a response written by financial expert Dave Ramsey in his “DaveSays” column appearing in the Rochester Daily Bulletin.
Ramsey’s explanation of the differences between a credit union and a bank are that banks are owned by shareholders, with profits returning to the shareholders through dividends or a climbing stock price. By contrast, a credit union is a nonprofit entity and any “profit” is “returned to the members” with services and rates, or even a disbursement check.
Ramsey argues that credit unions’ non-profit status is misunderstood as having an unfair advantage, because, as he argues, a “bank could do the same thing if it were willing to make less profit.” Some of Ramsey’s statements are inaccurate and one-sided, so here are a few insights that he left out in his assessment.
On credit unions operating as a non-profit: While credit unions do have the distinction of being non-profit in terms of how the IRS categorizes them, they are far from being non-profit in practice. The ten largest credit unions in the Twin Cities had profits totaling near $120 million in 2016. Across the United States, there are close to 300 credit unions that have assets of $1 billion or more, and executives receive six- and even seven-figure compensation packages. In addition, these credit unions claim the naming rights for an NBA arena and advertise during NFL games. Doesn’t sound much like a non-profit entity, does it?
On credit unions not having a perceived advantage: It’s not just perceived; credit unions have a real advantage in the ability to be highly profitable, yet never pay taxes on those profits. Overall, credit unions have strayed from their original purpose, and many of the lending restrictions and “common bond” membership requirements are no longer in effect. Credit unions effectively operate as a bank, with a non-profit status that provides a 30 to 40 percent pricing advantage over community banks, which are required to pay taxes.
On the real cost of credit unions: Taxpayers are shouldering the burden of credit unions’ non-profit status. The Congressional Joint Committee on Taxation has reported that by 2020, the credit union tax exemption will have cost taxpayers $3.2 billion annually. While eliminating credit unions’ non-profit status won’t solve all the nation’s budget issues, it would certainly be a good start.
Community banks have just as little to do with large, profitable credit unions as they do with Wall Street banks. The distinguishing features of community banks have to do with our ability to keep financial decisions close to home and invest in the people and businesses that help the community thrive. Community banks prioritize these practices, along with meeting regulatory benchmarks for earnings and paying income taxes.
Membership in ICBM provides you with the insight and resources you need to answer questions like these about the advantages of doing business with community banks. It also gives community banks a united approach to counter misleading information about our industry. Give ICBM a call to learn more about the benefits of membership.