Undercurrent strong in competition between credit unions, banks

Banks and credit unions may appear similar to the casual observer.
Both usually have a row of tellers, ATMs, and drive-thru windows. They offer savings and checking accounts, loans and other financial services.
While they appear the same and serve a similar customer base, banks and credit unions view themselves very differently and harbor animosity toward each other. As credit unions have become a greater competitive threat to banks, banking groups have gone through phases where they have challenged the existence of credit unions – and have mostly failed.
The average U.S. credit union has $93 million in assets in 2007, compared to the average bank which had $1.53 billion. In their challenges, banks often came off as Goliath bearing down on David. The nation’s more than 70 million credit union members have historically beaten back efforts to curtail credit union activities. Credit union public relations campaign, such as www.lovemy creditunion.org, keeps members mindful.
Changing times
A generation ago, credit unions were an inconvenience to banks. Credit unions served limited populations – a company’s employees, a group of disabled individuals or congregants of a particular church. They rarely had a physical presence. As limits on credit unions eroded, they became more of a competitive threat. Credit unions merged, expanded membership and expanded services beyond the savings-and-loan model offering checking (called share drafts), debit cards and mortgages.
“Congress gave credit unions tax-exempt status and a lighter regulatory burden to serve people of modest means or undeserved population – that’s the law,” said Paul Merski, chief economist of the Independent Community Bankers of America. “That’s all been done away with and credit unions have moved far beyond what they were originally created to do. They can essentially take on anyone as a member and are providing financial services available in a highly competitive market, with an unfair advantage of not paying taxes.”
Credit unions, however, argue that they have restrictions on their activities – limits that bank’s don’t have. They feel their tax-exempt status is completely warranted.
They pay no federal taxes, but they do pay local taxes on their real estate as a bank does.
Their customers are limited to the membership categorizes. While the membership universe has expanded, would-be members still have to meet the criteria.
Credit unions point out they are prohibited by law from engaging in the profitable business lines that banks engaging in, such as investment banking.
While they offer commercial loans, they are restricted in the kind and amount they can offer. While a bank may lend money anywhere to anyone, credit union regulators look sceptically at a credit union lending money outside its service area.
Credit unions can’t raise money on the capital markets – through issuing stock or bond – to finance their activities the way banks do. Credit union advocates also try to claim the moral high-ground. One slogan is “for people, not for profit.”
“Banks’ earn a profit to distribute it to shareholders,” said Nina Waskevich, vice president of marketing of Tobyhanna Federal Credit Union. “Our margin stays here, to provide better service and better rates to our members.”
The next battle
Bankers see things more on the face – banks and credit unions overwhelmingly overlap, said Mr. Merski.
“It’s like having two flower shops and one pays taxes and the other doesn’t,” he said.
The banking industry is dealing with regulatory changes, poor earnings, and the sluggish economy. It hasn’t had the time or energy for another charge at credit unions, but Mr. Merski hit on a theme that the industry may use in the future volleys: that credit unions are a cost to the American taxpayer.
Those charging at the credit union have dusted off a 2005 study by the Tax Foundation which called the credit union tax-exemption an “unjustifiable loss” to the U.S. Treasury amounting to $31.3 billion over 2004 to 2013. Diane Powell, spokesperson for the Pennsylvania Credit Union Association, said banks are not above attempting to limit their tax liability and said some have converted to Sub Chapter S Corporations to avoid taxes.
“We don’t pay corporate taxes because we are not corporations and we don’t have a profit,” Ms. Powell said. “If our tax structure is such an advantage, banks should be converting to credit unions, we would welcome them.”
Contact the writer: dfalchek@timesshamrock.com
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