Credit Unions, Fintechs and Banks — What’s the difference?
Ever wonder what the difference is between a bank and a credit union? Or what’s the deal with all those apps you keep hearing about, like Robinhood and Acorns? We know the financial industry is incredibly complicated — it can even be confusing to us. But that’s why we wanted to write a short explainer about the key differences between the types of financial service companies out there and give you some info so you can navigate the landscape like a pro.
Let’s start from the top.
At the highest level, we put financial institutions into a few major categories. Often, companies in one category will offer products that are the focus of those in other categories, but this is a good place to start:
- Traditional banks (think Bank of America, Chase and Wells Fargo)
- Credit Unions (think Alliant, Navy Federal and Connexus)
- Traditional Brokerages (think Fidelity, Charles Schwab and E*Trade)
- Neobanks (think Varo, Chime and Ally)
- Fintechs* (think Acorns, Robinhood, and Paypal)
Traditional banks
When you think of “banking”, these are probably who you imagine: Bank of America, Citi, Chase, PNC and Wells Fargo, just to name a few. These traditional, for-profit banks can be massive (i.e., holding almost $2 TRILLION in customer deposits) and often have physical branches all over the country. They will also typically act as a one-stop-shop and offer the full range of financial products, from basic checking and savings accounts to personal loans and mortgages to investment services. They are strong options if you need to access many different products and seek a higher level of service — and also don’t mind paying the higher fees they typically charge. They will often market themselves as being customer-first (and in some cases they are!), but at the end of the day, they are for-profit companies with shareholders and as a result, often charge higher fees and offer lower interest on deposits than other options we discuss here.
Credit unions — if banks had a younger, friendlier sibling
Credit unions are relatively newer to the game than traditional banks, first popping up in the U.S. in the early 1900s. Credit unions arose as a way for members of a community to pool their resources together to help each other in times of need, and this ‘pooling’ structure is still evident today; you must become a member of a credit union to join and use their services. Unlike banks, credit unions are owned by their own members and are non-profit institutions. That is, they seek to provide the best services for their members, rather than to generate profits for outside owners. This has two major implications. The first is that there are often eligibility rules you must meet in order to join, typically centered on where you live, work or worship. For example, to join Navy Federal Credit Union, you or a family member must be a current or former member of the military. Some credit unions, however, have found a way to expand their membership beyond this and simply require you to join a non-profit organization with which they are affiliated, typically for a small one time-fee of $5-$10. For example, Consumers Credit Union just requires you to pay a $5 fee to their sponsor, the Consumers Cooperative Association, and then make a $5 deposit to open an account.
There are thousands of credit unions in the U.S. alone, and they will differ in terms of the products and services they offer. One unique aspect of credit unions is their approach to “shared branching”. Because they often target a specific region or population but might have members country-wide, many credit unions allow members of other credit unions to use their physical branches as well. This increases the number of branches a member of a credit union can use from a dozen or so to over 5,000 around the country. Because they have physical branches, credit unions still have many of the fees that traditional banks do, so often charge their members fees. Generally, however, credit unions strive to put their members first and offer the best rates and lowest fees that they can.
Traditional brokerages — where your money meets Wall Street
Brokerages specialize in helping their customers buy and sell stocks, bonds and mutual funds. Some of the biggest names that you might have heard of are Fidelity, Charles Schwab, E*Trade or TD Ameritrade. These companies often require high minimum deposits to sign up and charge you a fee every time you buy or sell a stock and possibly also a fee based on how much money you have invested with them (typically 1–2%). As such, these are often tailored towards customers with high wealth and a desire for higher levels of guidance and advice when investing their money. Because of these hurdles, a lot of new companies are starting to pop up that are specifically trying to make investing more accessible (see Fintechs below).
Neobanks — digital-first banks trying to eliminate the problems of traditional banks
Neobanks, also called ‘challenger’ banks or ‘online’ banks, are online-only banks designed to make banking as convenient as possible. Some of the most well-known in the U.S. are Varo, Chime, Simple, and Ally. As you might expect from online-only companies, these banks typically do not have any physical branches at all, and instead rely on the strength of their websites, mobile apps, and remote customer service to serve customers. A major benefit of being totally digital is that these banks do not have to pay for any physical locations and are thus able to offer better rates and lower fees to their customers in turn. It is not uncommon to find neobanks offering almost entirely free accounts and interest rates on savings deposits over 10x higher than that of traditional banks. Because they are technology-first, many offer automatic tools to help you manage your funds and save more easily. Banks like this are rapidly gaining in popularity in the U.S. due to their simplicity, transparency and low-cost structures. (We recommend a few of them ourselves here at Let’s Get Set!)
However, being online-only does have a few drawbacks. First, while they often have strong customer support and simple platforms to use, if you need to speak to someone in person at a branch, you are likely out of luck. Secondly, they often do not have their own ATM networks like traditional banks and credit unions do. They will often participate in a network of ATMs that provide free access around the country to withdraw cash, but depositing cash is more difficult. Many partner with other companies, such as GreenDot, that enable their customers to deposit cash at major retailers and convenience stores. This often carries a fee of $3-$6 dollars to do so, though (we highly recommend using direct deposit!).
Fintechs — the high-tech alternatives to all of the above
Finally, we have the financial-technology companies, or “fintechs”. These are companies that often offer an improved, but specific, financial product or service through new technologies. Venmo and PayPal are two examples of fintechs that decided to make it easier and quicker to send each other money. Robinhood and Acorns both started as apps specifically to help lower the cost of investing in the stock market. There are also fintechs that help automate savings, monitor your accounts, improve your budgets, and everything in between. Many of these companies continuously add more and more features to expand what they can offer their customers. For example, Credit Karma, a company that initially helped you monitor your credit scores, now also offers savings accounts. Most often, these products are free or require a low monthly subscription to use. We are excited about what many of these companies are able to do, but none of them are quite yet ready to replace banks, credit unions or neobanks as your primary banking partner. This is the category that we, Let’s Get Set, fall into too! (Yes, that means we will keep trying to find even better ways to help you reach your savings goals!)
So how do I know what’s best for me?
Ultimately that depends on factors like your income, your level of financial stability, and your financial goals. For most of the hardworking families we serve, we find that fintechs and credit unions best meet their general banking needs because they allow families to optimize for flexibility and control. Of course everyone is different, but we’ve seen time and time again how fees — be it minimum balances or overdraft fees — hurt families we serve. That’s why we prioritize flexibility and control in helping our families find safe banking options.
