Distinguishing Differences in Financial Institutions: Ever wondered how a big bank differs from a credit union? Here's how.
Banks and credit unions are among the most prominent financial services companies serving Alaskans. However, there are distinct differences--and similarities--between how these institutions function to meet the needs of businesses and consumers. And each one fills a particular role in the financial services marketplace.
The state's diverse roster of financial institutions also includes specialized entities: trust companies, finance companies, money service businesses, mortgage lenders/loan originators, and payday lenders. All of these institutions give Alaskans more choices when it comes to satisfying their financial requirements.
As a brief regulatory overview, the United States has a dual banking system that allows financial institutions to choose a state or national charter, which, in turn, determines how they are governed and function. The federal Office of the Comptroller of the Currency (OCC) oversees banks that operate nationally, and the Federal Reserve regulates most state banks. The National Credit Union Administration (NCUA) regulates, charters, and supervises federal credit unions.
And as an area of dissimilarity, deposits at banks and credit unions are insured by different regulatory bodies. The Federal Deposit Insurance Corporation (FDIC) provides insurance for individual bank deposits up to $250,000 while the NCUA provides insurance up to $250,000 per share deposit for credit unions.
Within Alaska, the Alaska Division of Banking and Securities regulates many of the financial institutions that operate in the state. The division charters and examines state-chartered banks, bank holding companies, credit unions, trust companies, small loan companies, business and industrial development corporations (BIDCOs), payday lenders, and premium finance companies. More specifically, it regulates four banks--Northrim Bank, First Bank, Denali State Bank, and Mt. McKinley Bank--and one credit union: Credit Union 1.
Banks and credit unions that are chartered in Alaska must adhere to distinct statutes, according to Patrice Walsh, director of the Alaska Division of Banking and Securities. Banks must follow AS 06.05. Alaska Banking Code. Credit unions are bound by AS 06.45. Alaska Credit Union Act. And both banks and credit unions must follow AS 06.01. Banks and Financial Institutions. "The credit union is a nonprofit and the banks are privately-owned corporations, so there are slightly different guidelines," Walsh says.
The ownership structure is one of the key differences between the two types of institutions. Banks are private businesses owned by a few individuals or entities, and credit unions are nonprofit cooperatives owned by all of their customers--referred to as "members." As not-for-profit cooperatives, credit unions are exempt from federal income at the entity level while banks generally pay taxes at the corporate level. The tax exemption is designed to support credit unions in their original mission to give people with a "common bond" and modest means affordable access to banking services.
Many people are confused about the differences between banks and credit unions. The distinction between these entities' is typically not visible to most people as the difference is related more to how the institutions are run versus the functions they perform, according to Elaine Kroll of First National Bank Alaska. "Both banks and credit unions provide very similar consumer products and services such as check cashing, depository transactions, ATM services, and loans," says Kroll, senior vice president of cash management and Anchorage branch administration director. "This similarity can be confusing to consumers, who wonder why credit unions seem to offer better pricing on loans and deposits."
Kroll attributes the difference in pricing to credit unions' tax-exempt status. She explains: "Paying taxes is a significant cost of doing business incurred by banks: under today's rules, credit unions can compete for the exact same market share, only with a tax-free advantage."
There are also contrasts between different kinds of banks, such as national and regional or community banks. They all offer similar products and services, but national banks may be able to brirg to market innovative products or services more quickly than a regional bank, Kroll says. That's because national banks may have more leverage across a larger branch network and a greater number of customers over which to spread the expense. But technology is helping level the playing field. "National banks are quick to meet the demands of consumers nationwide, but with the evolution of technology-based services such as online banking, bill pay, mobile deposits, and money transfer options like Zelle, community banks are closing the gap," she says.
Kroll continues: "Regional or community banks are well-known to be more customer-friendly because of their local presence and knowledge. Loan requests and/or other customer needs can be nimbly and quickly met at the local level versus a standardized, non-flexible approach with which many larger banks struggle."
Michael Martin, executive vice president, chief operations officer, general counsel, and corporate secretary at Northrim Bank, expresses similar thoughts. Community banks are much more localized, he says, and this allows them to really specialize and become experts in what makes Alaska's economy work. For example, Northrim has sixteen branches in the state and strictly focuses on meeting the needs of Alaskans. "What we like to say is that we're fully invested in the state of Alaska because that is clearly where we have all our operations," he explains.
Community banks, like larger institutions, are spending a tremendous amount of capital to provide customers with the latest and greatest technology to enhance their access to banking services, says Martin, who also serves as vice president of the Alaska Bankers Association. Northrim, which is a $1.5 billion bank, has an app that allows customers to do pretty much anything they can do in a branch. Although Northrim gives customers different ways to do their banking, it still prioritizes providing "customer first" service. "Banks and credit unions are quick adaptors, and the price of technology is where we can keep up these days," he says. "I believe there will always be people who will value customer service."
Wells Fargo & Company is a major example of a nationwide, diversified financial services company that offers a vast array of services to Alaskans. The San Francisco-based company provides banking, insurance, investments, mortgage, and consumer and commercial finance through more than 8,700 locations, more than 12,500 ATMs, online, and on mobile devices. With approximately 262,000 team members, Wells Fargo serves one in three households in the United States, according to its website.
In Alaska. Wells Fargo's 640 Alaska team members serve the state through a network of forty-eight banking, mortgage, and investment offices and 117 ATMs in twenty-eight communities from Ketchikan to Barrow, according to Wells Fargo Alaska Regional Bank President Greg Deal. "Wells Fargo has maintained the largest market share among banks in Alaska since the late 1960s (currently 50 percent of all deposits)." he says. "Wells Fargo has more than doubled its deposits since the National Bank of Alaska merger, from $2.4 billion in 2001 to $6 billion in 2018."
As a company, Wells Fargo employs innovation and technology to build stronger relationships with customers. For example, it recently introduced card-free ATMs and a free Control Tower mobile banking service to give customers a snapshot of their digital financial footprint. "It's about giving our customers information to make better-informed financial decisions and giving them the tools and ability to instantly complete a transaction whenever they want and wherever they are," Deal says.
Non-traditional, online-only banks are another option for Alaska businesses and consumers. Online banks like Discover Bank, Capital One 360, and E-Trade boast lower fees and loan interest rates as well as higher earnings on deposit accounts. These banks--which are federally-regulated and -insured--may be a viable alternative for someone seeking to make a short-term deposit and earn higher interest, according to Kaitlin Morris, MPA, Financial Examiner III with the Alaska Division of Banking and Securities. "They have a place in the competitive market," says Morris, whose job entails evaluating the soundness and safety of financial institutions.
Credit Union Characteristics
Credit unions possess a variety of distinct characteristics, such as democratic control of their financial institutions. Members vote for their board of directors, who must be members of the credit union. Also, credit unions must rely on their retained earnings (or profit) to raise capital for growth; banks can sell stock to raise capital. In addition, credit unions have a statutory cap on their business-lending activities because, in part, they are formed for the purpose of promoting thrift among their members and providing them with a low-cost source of credit.
As financial cooperatives, credit unions operate with a "people first" principle, says Randy Butler, regional executive at Denali a division of Nuvision Federal Credit Union. "In general, you'll find credit unions offer lower costs on loans and fees and provide higher dividends on deposits than banks," he says.
Butler says products offered by banks and credit unions are pretty commoditized in today's financial field, with both types of institutions offering similar services. And the outdated perception of a "traditional" credit union only serving a single business or small group of people generally does not exist any longer, he says, explaining: "For many people, their concept of a credit union may be where they can open a 'Christmas savings' account and, perhaps, get a car loan. Today's credit unions offer complete financial services to assist the member with all aspects of his/her financial life."
Like banks, credit unions also offer online and mobile services to ensure members have secure, easy access to their accounts. After all, people expect their bank or credit union to offer 24/7 access to accounts and to be secure, Butler says. He elaborates: "If you are not able to offer around-the-clock access to accounts, loan applications and follow-up, mobile banking [to include remote deposit capture and other remote access services], a call center, ATMs, and other financial technology channels, you are going to have a tough time competing for customers/members."
Over the years, credit unions have had to overcome the misconception that they cannot offer the same breadth of personal access to accounts as larger banks. However, in the "cooperative" spirit of credit unions, several shared branch and shared ATM networks have been created, which offer access across the nation. Butler explains: "Denali, as an example, is part of the CO-OP Financial Services network, which includes more than 5,600 shared branches Iwhich is, in effect, the second-largest branch network in the United States] and access to more than 30,000 ATMs [nearly doubling the size of the largest bank ATM network]. Our members can conduct no-surcharge transactions at all of these ATMs and at the shared branches, just like they'd be able to do at any of our branches in Alaska or Washington."
Today, credit unions and banks are experiencing a trend toward more consolidation. There were roughly 12,000 credit unions in the United States about twenty years ago, and now there are approximately 6,000, Butler says. And according to a December 2018 report by the Congressional Research Service, the total number of credit unions declined from 9,014 to 5,573 between 2004 and 2017. During that same period, the number of community banks declined from 8,379 to 4,920. However, the number of credit unions with $1 billion or more in total assets increased from 99 to 287.
Denali is a dynamic example of how the consolidation trend is playing out in Alaska. Denali merged with Nuvision Credit Union in September 2018 and recently completed an upgrade to a new core computer system. "The merger with Nuvision now means we are a financial institution with the strength of $2.3 billion in assets and more than 170,000 members [compared to $670 million and 72,000 members prior to the merger] and branch offices in five western states: Alaska, Washington, California, Arizona, and Wyoming," Butler says.
He adds: "This is an exciting time for Denali as we are working toward introducing new products to members and building a long-term service model keyed on the new computer system that's in place. Denali's fifteen-branch network that we built in Alaska and Washington remains in place, joining with the sixteen branches in Nuvision's network to offer multi-state services to members in addition to the shared branch/ATM networks in which both Denali and Nuvision participate."
Specialized Financial Institutions
Along with overseeing banks and credit unions, the Alaska Banking and Securities Division regulates an assortment of specialized financial institutions. A prime example is Alaska's first BIDCO, Alaska Growth Capital (AGC. Founded in 1997, AGC BIDCO fosters economic development and job creation by providing loans, investments, and management assistance to businesses. AGC supplies business loans utilizing programs offered by the Small Business Administration (SBA) and the US Department of Agriculture (USDA), providing financing up to--and in some cases exceeding--$10 million.
The unique nature of BIDCOs let them maintain more flexible lending practices. Because a BIDCO is a private entity and does not take on deposits, it often has the ability to take on more risk than other types of financial institutions, according to Morris. Banks and credit unions, on the other hand, carry more regulatory burden because they collect deposits from the public and private entities. However, a BIDCO can provide funding to entrepreneurs who may be starting higher-risk businesses as well as pull in banking partners to participate on larger loans if necessary. "Our financial system really works together with spurring economic development around the state," she says. "It's all based on risk appetite, board approval, and monitoring these risks as they go."
Morris adds: "Our team regulates BIDCOs, and we ensure that they are lending in a safe and sound manner and are following state statutes. We make sure they have the appropriate policies and procedures in place."
Another type of specialized financial services entity overseen by the Alaska Division of Banking and Securities is trust companies. Currently, the division regulates four such entities, including Peak Trust Company (formerly Alaska Trust Company). As a full-service provider, the firm offers legacy planning services to individuals, families, and their advisors. Peak Trust assists clients with trust and estate administration, investment management, and family planning in general (transitioning wealth). Unlike a trust department located within a bank, the company provides fiduciary services as its core business. "While Peak Trust is technically a bank under Alaska statutes, we are a limited services bank--meaning we don't take deposits and make loans," says President and CEO Matt Blattmachr.
Although most people do not think of Alaska as a financial services hub, Blattmachr says, Alaska has some of the best trust and estate planning laws in the nation. "That provides a huge advantage to Alaskans and brings outside revenue to the state," he says. "It's a very good kind of economic diversifier. It's attractive for people to do business here."
Alaska also has a wide range of other financial services industries operating in the state. According to Walsh, the Alaska Division of Banking and Securities regulates 2,700 mortgage loan originators, 306 mortgage lenders, 111 money service businesses, twenty-six premium finance companies, twenty-three payday lenders, and ten small loan companies.
Alaska's diverse financial institutions play an important role in the economy and are beneficial for consumers and businesses, Walsh says. "Each one is needed, and each one serves its role," she says. "This gives Alaskans a variety of choices in the financial marketplace."
By Tracy Barbour
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|Comment:||Distinguishing Differences in Financial Institutions: Ever wondered how a big bank differs from a credit union?|
|Publication:||Alaska Business Monthly|
|Date:||Aug 1, 2019|
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