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