When you think of applying for a loan, depositing your savings, taking out a mortgage, or applying for a credit card, whom do you turn to? If you said, ‘a bank’, you’re not wrong. However, that’s not the only option, and it certainly may not be the best choice for you. There are many financial institutions that perform the same functions as a bank, but with added advantages to you as a customer. Chief amongst them are credit unions. Did you know that a credit union can give you a loan, let you take out a mortgage, refinance loans, give you a credit card, allow you to conveniently use ATMs and almost anything else a bank would do? Unlike a bank that exists to make a profit, credit unions exist to serve their customers who are members. And, most importantly, credit unions pay back a portion of their profits to their member-customers. So, just how does a credit union work? Read on to explore everything you need to know about credit unions!
History of Credit Unions
To understand how a credit union works, it helps to know why they were started in the first place. Banks predate credit unions, so what kind of gap did they fill?
The very first credit union in Canada was started by Alphonse Desjardins in Levis, Quebec. It was called ‘people’s bank’ or caisse populaire. Over the years, attempts were made to establish credit unions in Ontario as well as the West, especially following the Great Depression in 1920. It was at that time that the economy in North America had experienced one of its lowest ebbs. People were struggling to make ends meet. Many had lost their entire savings and livelihoods. Finally in the 1930s, those associated with the Antigonish Movement established a credit union in Broad Cove. In the next decade, credit unions sprung up across Canada. Co-operation which was a characteristic of the Antigonish Movement formed the very basis of the credit union model. This is important to note because it gives a keen insight into how credit unions function. Which brings us to…
How Does a Credit Union Work?
The simplest way to explain a credit union is to think of it as a pool of funds created by the members. Members of a credit union put their savings together. When other members require loans or any kind of financing, they borrow from this joint pool of funds. When a credit union makes a profit, the sum is paid out to the members in the form of dividends. Let’s understand this better through an example.
Suppose there are five people who have decided to pool their funds together: Jill, Rob, John, Sarah and Emily. Each contributes a certain amount to the credit union. Jill puts in $5, Rob puts in $10, John puts in $15, while both Sarah and Emily put in $20 each. The sum of their savings is now $70. Suppose if Rob wanted to borrow $5. He would approach the group and get a loan of $5. The total pool of funds with our hypothetical group of people is now $65. Apart from paying back the $5 that he borrowed, Rob will also have to pay back an interest amount of $1. Once he pays back his loan, the total pool of funds that the group will have would be $70, plus the $1 in interest. Now the group has $71. They have collectively made a profit of $1. This $1 is divided amongst the members of the group after a set amount of time.
The amount each will receive will depend on how much they initially contributed. Sarah and Emily would get a larger share as they contributed a larger amount. Jill would get the smallest share since she contributed the least. How much each person in the group gets may vary, but it is crucial to understand that every one of them does get a share.
As you have probably figured out in this example, the group is a credit union. Rob, Jill, Sarah, Emily, and John are the credit union members. Of course, in real credit unions, there are many more members, and the savings and loans involve much larger amounts. There are also operational costs and other expenses that keep the credit union up and running such as employee salaries, costs to provide financial services, funds that go towards community initiatives, etc. How the profit is paid out will also depend on the policies of each credit union as well, but it does go right back to the members.
The three prime features of a credit union include:
- Ownership by members
- Profit sharing
- Community-serving
How do these principles play out at Innovation? Let’s take a look.
Members as Owners Who Earn Equity
As you know, customers at credit unions are not just customers. They are part owners of the credit union. When you join Innovation, you are charged a $5 membership fee. This is not any old sign-up fee. It gives you a share of Innovation Federal Credit Union. That’s right. You — and every new Innovation member — actually owns $5 worth of Innovation Federal Credit Union shares, making you a part owner as soon as you join. As a part owner, you also get a share of cash dividends and equity, which is deposited into your Member Rewards Account. While you already get $5 worth of equity when you join, you also earn equity every time you bank with Innovation. That means when you take out a loan, make a savings deposit, take out a mortgage, create a term deposit, open a line of credit, invest in a GIC, you stand to earn a little more Innovation equity. The more equity you own, the larger a share of the profits you will receive. Since 2007, we’ve shared approximately $43.25 million in profits with our Innovation members.
Member Rewards Account
Credit union members get a share of the profits, and you’ve seen above how that is true at Innovation too. What you may be curious about is just how you get the profits. Profits are paid out in the form of cash dividends and equity which are deposited in your Member Rewards account. What is your Member Rewards account? When you join Innovation, you are automatically enrolled into our rewards loyalty program. Each quarter, you’re paid your portion of profits in the form of cash dividends and equity into your Member Rewards account. As our CEO, Daniel Johnson puts it, “This is such a win-win because our members gain valuable cash just for banking with us. The more business they do with us, such as taking advantage of our lending and savings products, the more Member Rewards they earn.”
Sharing the Profits
At Innovation, members are given their share of the profits in the form of equity and cash dividends. The Innovation Board approves the payment of equity and cash dividends based on the performance of the credit union. This means that the better the business aspect of Innovation goes, the greater the profits we can share with our members. To ensure that we perform well every single quarter we’re constantly improving and innovating. From attractive interest rates and digital banking to a ding-free ATM network, we strive to provide our members with the best products and services.
Innovation also pays members who are age 18 and under $5 every three months.
Once you receive your cash dividend, you can choose between saving it in your Member Rewards account or spending the cash. If you’d like to spend rather than save, the cash balance from your Member Rewards account can be transferred to any other account. You can even set up an automatic transfer of your cash balance from your Member Rewards account to your chequing or savings account.
Responsible Banking™ - Working for the Greater Good
As you can see, credit unions work towards serving their members as much as possible. At Innovation, we do this by following the principle of Responsible Banking which includes enabling our members to Save, Earn, and Give.
Save
Every current Innovation member (or future member) is provided with attractive rates of interest and offers on their loan products. For example, at Innovation we pride ourselves on offering some incredibly low mortgage interest rates. We even regularly run offers on loans such as welcome offers on personal loans. Certain loans we offer even help our members to build their credit ratings so that they can take advantage of even more suitable loans in the future. Even beyond loans we look out for each of our members by providing them with No-Fee Bank Accounts. That’s right, at Innovation, members can bank for free! This saves them as much as $360 in banking fees every year.
Earn
As we’ve already discussed, our Member Rewards program allows you to earn money simply by doing your everyday banking with us.
Give
Banking with us helps support your community. Since 2007, our members have helped us give back over $9 to the communities we serve.
There you have it. We hope you’ve got a firm grasp on how credit unions work and especially how Innovation stays true to all the principles of a credit union. Joining a credit union is a great way to be in control of your finances and with Innovation we will help you save, earn, and give back too! You’ll enjoy all the advantages of online banking services, plus dedicated support from trusted advisors who can help you grow your wealth. Join us and save, earn, and give more today!