In Focus – SCCCU Blog

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 group is outlined in the credit union’s charter. For example, one of the largest credit unions in the country is 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 particular neighborhood, a local community, or a profession.
• When people join a credit union, they own a "share" of it, making them part owners. This allows members to run for election to become credit union officials, vote for the credit union’s other officials, and weigh in on some other matters.
• Like other not-for-profits, 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.

Making sure federal credit unions follow the above guidelines is the responsibility of 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. They get some significant 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 still owe Uncle Sam some money, like payroll 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 can 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 through reduced fees, higher savings rates, and lower loan rates.”

Credit Unions Invest in Members and 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, such as 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 are “focused on a mission,” says Servon. “Non-profits tend to have a purpose 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 from customers or the business, it gets invested back into it.”