It’s a common misconception that community banks and credit unions are the same. After all, they both boast a focus on community and promise more relationship-based financial services than large national chain banks.
But community banks and credit unions are not the same.
Credit unions were originally established as not-for-profit financial cooperatives that were limited to serving specific groups with a common bond, often targeting trade professions (for instance, one credit union originally served airline pilots). However, the landscape has changed drastically since credit unions first arrived on the scene.
Today’s credit unions have grown immensely in size and profitability, and they are no longer restricted to serving only those with a common bond. Most credit unions now serve the general population, just like banks. However, many of the original restrictions that were in place to balance credit unions’ tax-exempt status have been lifted, allowing credit unions to enjoy significant tax advantages that impact communities in various ways.
The biggest tax advantage credit unions enjoy is their tax-exempt status. Unlike tax-paying community banks that contribute to the financial resources and support of public services, credit unions remain exempt from corporate income taxes. This means that credit unions are able to generate substantial profits (as evidenced by approximately $324 million in profits generated by credit unions in Minnesota in 2022) without contributing a single dollar in corporate income taxes.
Credit unions also enjoy an exemption from the Community Reinvestment Act (CRA), a federal law enacted in 1977 and specifically designed to ensure that banks fulfill the credit needs of the communities in which they operate, particularly in low- and moderate-income neighborhoods. By combating discriminatory lending practices and promoting fair access to credit, mortgages, small business loans, and other financial services, the CRA aims to uplift underserved communities, and community banks are happy to be a part of that effort. However, credit unions are not bound by these obligations, which allows them to be more selective in whom they serve.
Community banks and credit unions have their similarities, but it’s worth understanding their differences as you choose a financial institution that aligns with your values and expectations for community support. By banking with a community bank, you’re actively contributing to the well-being of your local community.