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Are credit unions not-for-profit? The answer is yes, but they differ in several important ways from your typical not-for-profit charity. For starters, a charity’s not-for-profit status is rooted in its mission, which is to raise funds for a specific cause. Alternatively, a credit union’s not-for-profit status comes from the fact that credit unions are member-owned.

“You are a customer at a bank, but you’re a member of a credit union,” says Filene Credit Union Fellow and University of Pennsylvania Professor Lisa Servon. “Banks are looking to serve you with products that you need, but also to maximize their profit. Credit unions…see you as having a stake in what they are doing and they’re more focused on your satisfaction than on making money.”

Even though they are not-for-profit, credit unions – just like charities – do have to cover the cost of doing business. Charities commonly rely on donations (via memberships, fundraising events, and the like), as well as grants. For credit unions, profits are generated via fees charged for services and returns on any investments they make.

Essentially, the fact that credit unions are not-for-profit organizations simply means that they are not looking to make a profit off of you, the customer, Servon says. “But that doesn’t mean they don’t charge any fees, or that there’s nothing to sell to pay staff, keep the lights on, and do all of the administrative work that’s necessary to run an organization.”

So, What Truly Makes a Credit Union?

The Federal Credit Union Act outlines the basic structure governing credit unions. According to Joe Adamoli, spokesperson for the National Credit Union Administration, credit unions typically have the following key characteristics:

• Membership is limited to a group or multiple groups. Each of these is outlined in the credit union’s charter. For example, one of the largest credit unions in the country is the Navy Federal Credit Union, where to become a member, you need to be affiliated with the United States Armed Forces, the Department of Defense, or the National Guard. Other types of credit unions can be specifically for members of a certain neighborhood, a local community, or another profession, like education.
• When a credit union member makes a deposit, they have “shares” in the credit union that make them part-owners. This lets members to run for election to become a credit union official, as well as vote for the credit union’s other officials, and weigh in on other matters.
• Much like other not-for-profit boards, credit unions are governed by a board of directors. The board is elected by credit union members (each member gets one vote, regardless of their stake in the credit union). Board members serve on a volunteer basis. Professional managers and staff of the credit union are typically compensated, but with federally chartered credit unions, only one member of the board may be compensated as a board officer.

Federal credit unions follow the above guidelines set by the National Credit Union Administration, a federal regulatory agency. Meanwhile, credit unions that are state-chartered are regulated by their respective states.

Let’s Talk Taxes

As you may know, being a not-for-profit comes with certain tax advantages. That holds true for charities as well as credit unions. They get some major tax breaks that can help them operate more efficiently. Credit unions don’t pay corporate income taxes, or most other federal taxes, thanks to the National Credit Union Administration exemption granted by the IRS. That said, they do still owe some money to Uncle Sam, like payroll taxes and local property taxes. “Credit unions merit a tax exemption as they have certain features that clearly distinguish them from other financial institutions and have not deviated from their original purpose,” explains Adamoli. “For example, credit unions still have a common bond among members and serve as a source of credit for low- and moderate-income people.”

Given their tax-exempt status, credit unions are able to offer a host of benefits to members. “Credit unions operate to promote the well-being of their members,” notes Adamoli. “Credit union earnings are returned to members in the form of reduced fees, higher savings rates, and lower loan rates.”

Credit Unions Invest in Their Members and Their Community

When you think of a not-for-profit charity, you might think of those who work to make a difference in their community. The same is true for credit unions. “In my experience of working with credit unions, I think of credit unions as being more focused on members, but in ways that go beyond just the products and the cost of the product,” says Servon.

For example, Servon says she regularly sees credit unions offering programs that benefit their members, and the community-at-large, like financial education programs. “I think that kind of community focus, because credit unions often have a very specific member base, whether it’s by region or they work with a particular industry or company, they also tend to get to know that group better and then that, combined with their mission, makes them more member-focused.”

The Bottom Line

Credit unions, much like charitable organizations, are “focused on a mission,” says Servon. “Non-profits tend to have a purpose that’s different from making a profit,” she says. The same goes for credit unions. “The idea is that any money that gets made gets put back into the organization, so rather than being extracted either from customers or from the business, it gets invested back into it.”

from our partnership with Filene/HerMoney