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Banks vs. Credit Unions: Who Has the Best Rates?


Banks vs. Credit Unions: Who Has the Best Rates?

The following post is from our analyst, Rodney, and is part of a regular and ongoing series of articles that seek to take a deeper and more concerted look into what we can glean from our proprietary depository banking data set. Our patented technology is tracking approximately 275,000 rates and 190,000 attributes (e.g. fees, min/max, EWP, etc.) across approximately 175,000 depository products from 7,500 banks and credit unions. With this series, we hope to examine broader averages, trends, and correlations within that data set and to look at what we might be able to learn from those figures....

Over the past several years, in the wake of the collapse of several major banking institutions, credit unions have experienced a surge in demand, as many consumers have searched for greener pastures for their banking needs. Credit unions have grown tremendously in that time, and no shortage of conversation exists around the World Wide Web regarding the pros and cons of those institutions versus traditional banks. While this article does not weigh in on the overall debate about which institution type is better for consumers, per se, it does conduct a quantitative investigation into one of the most important factors for depository consumers: interest rates.

The Details

We conducted research within our database that delves into the simple question of which institution type offers better rates on its deposit products—banks or credit unions.

We conducted research within our database that delves into the simple question of which institution type offers better rates on its deposit products—banks or credit unions. Specifically, we compared the average APYs offered by banks (not including internet-only banks; that’s a separate story that we’ll have out soon) and credit unions across the four consumer product types most common to depositors: 1 Year CD, 5 Year CD, Personal Checking, and Personal Savings/MMA. We based the analysis on a twenty-five thousand dollar deposit (we conducted the same research utilizing a one thousand dollar deposit with a very similar outcome).

The Results

The results of our study showed a simple, almost universal trend across the four products: credit unions offer better rates than banks at almost every level on almost every product. The occasional anomaly appeared, but every look at the numbers revealed a remarkably similar pattern.

Take a look at the raw numbers:

Current APY for CDs: Bank vs Credit Union

Current APY for Personal Checking and Personal Savings/MMA: Bank vs Credit Union

Across each product, credit unions offer a higher APY than banks, and the charts above demonstrate the trend. However, breaking the numbers out further gives an even more distinct picture. To further explore them, we took a more detailed approach to the institution information, breaking them into both institution type–bank or credit union– and asset size:

1. <$50MM
7. $500-$750MM
2. $50-$100MM
8. $750MM-$1B
3. $100-$200MM
9. $1-$2.5B
4. $200-$300MM
10. $2.5-$5B
5. $300-$400MM
11. $5B+
6. $400-$500MM

Not only does this breakdown reveal a higher APY on average, but another trend emerges:

Average APY Offered on 1 Year CDs: 
Bank vs Credit Unions

Average APY Offered on 5 Year CDs: 
Bank vs Credit Unions

Average APY Offered on Personal Checking: 
Bank vs Credit Union

Average APY Offered on Personal Savings/MMA: Bank vs Credit Unions

Among the CDs, the smallest institution size of the 5 Year CD is the one place the banks have a higher average APY than the credit unions. A few more instances of banks' having higher average APYs pop up among the liquid accounts (personal checking and personal savings/MMA), but again–on the whole– credit unions offer materially higher average APYs than do banks. Even more obvious in these charts, though, is the sizable disparity in rates among the larger institutions. A rather drastic separation emerges between the average rates offered on each product in the larger institution sizes, particularly among those institutions that are in the largest category, $5B and above.

A Deeper Look

Take another look at the difference in APY across the four products in a slightly different format. We compared the numbers for each product among each institution type according to the 11 size categories above and determined the percentage of difference between them. From this viewpoint, the advantage of the credit unions is clear on the whole, but the difference that emerges in the largest institutions is pretty staggering:

Percentage Difference in Average APY between Credit Unions and Banks on 1 Year CDs

Percentage Difference in Average APY between Credit Unions and Banks on 5 Yr CDs

Percentage Difference in Average APY between Credit Unions and Banks on Personal Checking

Percentage Difference in Average APY between Credit Unions and Banks on Personal Savings/MMA

The disparity in the smaller institution sizes is actually notable; however, much of it appears very near negligible in these charts in light of the staggering difference in the largest institution size. Here is one final look at the numbers that drills down into the largest institution size:

Difference in APY between Credit Unions & Banks Over Four Products: Institution Size $5 bil +

That’s right– 70%, the difference on the 5 Year CD, is the smallest difference between banks’ and credit unions’ average deposit rates in the largest institution size of $5B and higher. The greatest disparity is a whopping 184% on Savings/MMA accounts. Within this institution size, banks simply do not hold a candle to the product offerings of the credit unions on any of the four product categories.

Since the largest disparity in rates can be found among the largest institutions, we took this analysis one step further and looked at the five largest institutions of each type and compared their rates across the four products. You can guess the results, I’m quite sure, but here they are, nonetheless:

Top 5 Largest Banks vs Credit Unions: APY by Product

As the chart clearly shows, the largest credit unions offer substantially higher deposit rates across the board than their large traditional bank counterparts.

Why the Disparity?

In general, we know that credit unions are able to offer higher deposit rates than banks due to their member-oriented, not-for-profit model. This member focus means higher average rates for consumers of CD, checking, and savings products, as seen above in nearly every institution size category. But why the inordinate discrepancy between the largest credit unions and the largest banks?

First, consumers who choose to deposit with the mega banks often do so for sake of convenience (and/or inertia), not because of rates offered by the institution. ATMs on every corner, numerous brick and mortar locations for personal service, and excellent online banking services may draw depositors regardless of the rates offered on their products. As such, these banks benefit from a strong inelasticity of demand as it relates to deposit rates that credit unions and smaller banks do not, which enables them to keep customers without having to compete on deposit rates. Second, since the banking collapse of 2008, many of the largest banks must deal with expense-inducing regulatory red tape that credit unions and smaller banks do not, which quickly cuts into their bottom line and leaves less money available to offer to consumers through higher rates.

We also previously noted the rate discrepancy between the largest credit unions and their smaller counterparts. The difference here may likely be explained by economies of scale that disproportionately benefit larger credit unions, particularly in the areas of non-interest operating expenses (IT, marketing, vendor expenses, core systems, etc.). With lower operating expenses per member, the largest credit unions have a disproportionate amount of funds available to return to members in the form of higher deposit rates.

Conclusion

While numerous considerations factor into the bank vs. credit union discussion, one component that is almost uniformly appreciated among consumers is a higher interest rate on their deposited funds. As the above data analysis shows, in this key consideration, credit unions clearly have the upper hand.

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Comments
Anonymous
Anonymous   |     |   Comment #1
That's why I belong to eight of them thanks to this site. Even after my cd's matured I kept the minimum amount required in the savings (between 5-25 dollars). Even brokerage houses can't compete with them.
lawrence
lawrence (anonymous)   |     |   Comment #20
I have done the same but keeping a little money there is not always a good thing.  Usalliance has been offering good rates recently but ONLY for new members.
Anonymous
Anonymous   |     |   Comment #2
Non profits do not pay taxes. The banks do
Anonymous
Anonymous   |     |   Comment #3
As not-for-profit cooperatives, credit unions return their earnings to their members through higher savings rates and lower loan rates. Not like banks that send their money to shareholders.
Anonymous
Anonymous   |     |   Comment #16
Non profits do not pay millions of dollars to ceo's and other executives.  The banks do.
pua
pua   |     |   Comment #4
My informal impression is that credit unions favor borrowers much more than savers.What I mean is that credit unions seem to offer slightly higher interest rates to savers than banks offer; but credit unions seem to offer considerably lower interest rates to borrowers than banks do.  I have not tried to collect data on my hypothesis nationwide, and I have not even tried to examine the data systematically in my own area (Honolulu).  It would be interesting to see an analysis nationwide by the same analyst who wrote this report.  It's clear that credit unions have lower operating costs than banks, because nonprofits have smaller bureaucracies, lower-salaried staff, and pay no (or low) taxes, and have no investors to whom profits must be distributed.  So of course credit unions pay higher interest than banks for savers, and charge lower interest than banks for borrowers.  The question is how the credit unions divide up those cost-savings between borrowers and savers, and why do they divide the pie the way they do?
Anonymous
Anonymous   |     |   Comment #5
simple
borrowers pay more interest, savers get a little, CU pays their bills
Anonymous
Anonymous   |     |   Comment #15
I am a CEO of a CU for 28 years and some credit unions are more aggressive on the lending side and some are more on the deposit side. Each one of us are unique in our strategies to serve our members as best we can. Being a financial cooperative , not for profit (but for service), local decision making, volunteer Board of Directors, no corporate jets, better rates and lets not forget FEWER FEES and free checking is still available at most credit unions. We are truly in the sweet spot and consumers are joining the movement...Credit Unions have never asked for a bailout (bailouts are for boats) and Citibank has been bailed out for excessive risk taking 3 times...Weren't our elected leaders supposed to deal with too big too fail banks as they continue to grow faster than our industry although the momentum is changing...
Anonymous
Anonymous   |     |   Comment #18
Do you offer year end bonus dividends?
Anonymous
Anonymous   |     |   Comment #22
We do not at this time but when we reach 12% capital we plan on returning everything over that 12% capital level every year ...We are 9% capital today. There are many CUs doing bonus dividends and I thinks its great for consumers. Its the cherry on top!
Anonymous
Anonymous   |     |   Comment #23
Go for the cherry!
RJM
RJM   |     |   Comment #25
The downside is Im treated as a criminal if I walk in my local credit union wearing a baseball cap.

They have signs on the door telling you to take it off.  I take it off, nod at the guard and then go to the teller and had them my card and I figure then its ok to put my cap back on.

NOPE.  I thought the teller was going to come over the counter at me.

The closest credit union to me doesn't have the best deals but I use them the most. They don't bother me about my cap and I can deposit to any other CU account. They wont let me use the drive thru though because Im not a member.  I think the one time I needed cash, I was charged a $2-3 fee which at the time was worth it to avoid the mile and a half drive to another credit union.  I almost never use ATMs so I didn't even think of a free ATM which was probably in the grocery store near it.

Interestingly, a few years ago I needed a money order or cashiers check to pay the state where I got out of a speeding ticket by going to driving school.  The school cost money and the state got money but the ticket didn't show on my record.  But the ONLY place I could get a free money order was one of those predatory check cashing places.  They not only sold me the money order for free, they gave me a free cold drink of my choice. (It was a hot summer day)

I guess several of my online banks would have sold me one for free but I didn't want to wait a week to get it. Both my local credit unions wanted a fee.
Anonymous
Anonymous   |     |   Comment #26
We give one free money order per day and most financial institutions have the no hat policy to help prevent robberies. We just pay more attention to those wearing hats but don't enforce it like you are breaking the law. In Maine we don't need guards...perhaps your environment is not as safe and that branch has probably been robbed a lot if they have guards...
Anonymous
Anonymous   |     |   Comment #6
What is this? Circles and Arrows / Romper Room style with The Magic Mirror?
Anonymous
Anonymous   |     |   Comment #7
No.  Did you get lost while somebody was not holding your hand and end up here by mistake?
Anonymous
Anonymous   |     |   Comment #9
Nope
but i know where you've been :-
Anonymous
Anonymous   |     |   Comment #8
Thanks for the interesting article!
Anonymous
Anonymous   |     |   Comment #10
Most CUs do not understand how they could really be ahead of the crowd, e.g. offering bonus dividends.  Ask your CU (at the annual meeting or...) why not bonus dividends...drives members' loans and deposits!!!  Check it out.  Banks don't offer bonus dividends.
Anonymous
Anonymous   |     |   Comment #12
The ex head of Valor was driving a nice Mercedes as part of his compensation and a nice salary. Some execs at non profits make some big dollars.
Anonymous
Anonymous   |     |   Comment #17
In few cases that may be true, but look where it got Valor.
Anonymous
Anonymous   |     |   Comment #19
Early retirement!  He had an emergency fund!
notablindsheep
notablindsheep (anonymous)   |     |   Comment #11
If people are too lazy to switch to a credit union, they deserve to be treated like dirt and earn nothing in return.

Sorry, but I belong to some excellent credit unions (including some great nationwide ones, open to all, such as Alliant). A lot of my family and friends have switched as well (and they're all very happy), but I still have two friends that do nothing but whine and complain, yet are too lazy to switch. The banks LOVE those kind of ciustomers. The rest of us switch.
Anonymous
Anonymous   |     |   Comment #13
Aren't we smug!

Nobody deserves to be treated like dirt.
Anonymous
Anonymous   |     |   Comment #21
If God didn't want them to be sheared, he wouldn't have made them sheep.
Jennifer
Jennifer (anonymous)   |     |   Comment #14
I simply adore credit unions.   I think it's because of the word credit in their title!   I belong to 5 cu's..
RJM
RJM   |     |   Comment #24
Think of how much better rates they could all pay if they stopped all the advertising.

One didn't need a long formal study to know this, One just has to look around.
Anonymous
Anonymous   |     |   Comment #27
Most credit union ad budgets are very slim....don't think it would make a huge difference..
Anonymous
Anonymous   |     |   Comment #28
on the bank side that is a different story...heard we may see a large bank or two on the Superbowl...
Anonymous
Anonymous   |     |   Comment #29
Along those same lines, my local credit union caters more to borrowers than savers and pushes too many fancy perks for their credit card users.  The bigger they get, the more they act like banks.
timmccoy
timmccoy   |     |   Comment #30
There are other reasons for the "disparity" in rates you mention above.  Banks have stockholders who want dividends in exchange for the stock they purchased in the bank.  Those dividend payouts create the need for greater profits which is why banks charge more/higher fees, have higher loan rates and lower deposit rates.  These actions allow the bank to have profits after stockholders are paid.  Credit Unions do not have stockholders so "profits" can be given back to the customers (members) directly.  Eliminating a layer of expense gives them the ability to be more competitive on rates which is good for members.