Banks vs Credit Unions - The Definitive New Zealand Guide

Updated 9 October 2023

Summary

While almost everyone will be familiar with traditional banks such as ASB, ANZ and Westpac, they're not the only way to manage and invest your money.
Credit unions are relatively unknown and arguably operate somewhat 'under the radar'. However, credit unions can provide an alternative for everyday personal loans, car finance and investing in term deposits, among other services.
As many traditional banks are preoccupied with ensuring their shareholders are happy (which arguably means a lack of innovation and standard pricing), Credit Unions are alternative financial institutions that, we believe, genuinely have your best interests in mind, whether you’re looking for better rates on loans or a higher interest rate on a term deposit.
Our guide is published to explain what credit unions are, how they differ from traditional banks, the main differences between banks and credit unions, and the pros and cons of each.

Our guide covers:

Know This First: Why Don't NZ Credit Unions Have Credit Ratings?
There are many reasons why many New Zealand credit unions do not have credit ratings:

Scale and Size: Many credit unions in New Zealand are smaller in scale compared to mainstream banks. Obtaining a credit rating can be costly. For smaller institutions, the benefits of having a rating might not justify the costs.
Regulatory Framework: Under section 80 of the Banking (Prudential Supervision) Act 1989, the Reserve Bank of New Zealand requires all registered banks to obtain and maintain a current credit rating, as outlined in our credit ratings guide. Credit unions fall outside of this regulation and don't need to have credit ratings.
Nature of Business: Credit unions predominantly deal with their members. Their member-centric model means they might not often raise funds from the broader capital markets, where a credit rating would be arguably essential. Instead, credit unions rely on member deposits and other internal sources for funding.

Important: The absence of a credit rating does not necessarily imply any adverse comment on a credit union's financial health or stability. If you're considering joining or borrowing from a credit union in New Zealand, it's always a good idea to review its financial statements, ask about its financial health, and make an informed decision based on multiple factors.

What are Credit Unions and Who Are They?

A credit union is a cooperative financial organisation established to provide savings and loan facilities for its members. A credit union is member-owned, meaning the members that are a part of the union will also be providing the funding for other members. Credit unions are operated as non-profits, set up to support their members.

This structure is different to banks that will primarily be set up to generate profits for their shareholders. Credit unions are similar to traditional banks because they provide financial products to customers. Credit unions also provide their members access to everyday spending and savings accounts, credit cards and loans, similar to traditional banks. Credit unions in New Zealand are governed under the Friendly Societies and Credit Unions Act (1982).

The Most Well-Known Credit Unions in New Zealand:
Because credit unions are set up with a common purpose to bring members together, there are usually quite a few credit unions focused on different areas. The most popular are:

Unity Money: Formerly known under the Credit Union Baywide organisations, such as NZCU Baywide, NZCU Central and NZCU South.
First Credit Union (our review explains more)
New Zealand Credit Union (NZCU)

You can find a list of all credit unions online at the companies office.

What are the Key Differences and Similarities between Traditional Banks and Credit Unions?

Category	Traditional Banks	Credit Union
Ownership and Membership	Traditional banks are owned by investors and function as for-profit businesses, meaning their primary objective will be to maximise returns for their shareholders. Customers don't have a vote or say in how the bank is operated. This voting right sits with the shareholders. However, this won't always be the case, for instance, where a bank's customer is also a shareholder. There are examples where this isn't the case, such as partially-owned or fully-owned state-owned enterprises. A recent example is the New Zealand Government's acquisition of Kiwibank in 2022. Government-owned banks will usually have different objectives from traditional banks, as the Kiwibank acquisition documents outline.	Credit unions are non-profit and are owned by their members, known as "customer-owners''. In other words, each credit union consumer is also a part-owner and will be run by its members. The ultimate purpose of a credit union is to support and improve the economic livelihood of its members. Members of credit unions also can vote on credit union policies and actively participate in the credit union's direction. For example, credit union members get to vote on who gets elected to the board of directors of the credit union.
Ultimate Purpose	Traditional banks operate just like any other company. Banks will be set up to generate as much value for their shareholders as possible. Customer satisfaction may be a core principle of each bank, but it is a secondary objective. Companies will primarily aim to generate as much value for their shareholders as possible. Keep this in mind when dealing with banks.	Credit unions will usually have a wider mission to contribute to the social, economic and environmental well-being of the member community at large. For example, through better members' rates or general financial education, credit unions invest far more (relative to a bank's charitable spending relative to revenue generated) in communities or members.
Accessibility	Generally, most individuals and companies are eligible to open an account with traditional banks.	In many cases, you can only open an account with a credit union if you meet their specific eligibility criteria for membership. Not every individual or company is eligible to open an account with a credit union.
Availability of Branches	Given the sheer size of the organisation and the number of customers they service, traditional banks tend to be in many different locations around the country. In particular, almost all banks have branches and ATMs in all major cities.	Credit Unions are usually more local and work on a smaller scale than most traditional banks, so they generally have fewer physical branches and ATMs.
Product Offerings	Traditional banks offer personal and commercial banking products, including checking accounts, saving accounts, credit cards, term deposits and mortgages. Traditional banks may also offer other services, including share trading platforms, KiwiSaver funds, margin facilities, commercial loans and other forms of bespoke debt.	Generally, credit unions are far smaller in scale compared to traditional banks. As a result of this, credit unions tend to provide fewer products. For example, many will still offer standard checking and savings accounts but won't have the niche or complex products that traditional banks offer.
Fees	Since traditional banks need to make money for their investors, they tend to charge significantly higher fees than credit unions. Most banks will have a free checking account to entice customers to add funds to their accounts. However, their other products (such as credit cards or loan facilities) can come with hefty annual fees. For a comprehensive breakdown of the top credit cards, check out our comprehensive comparison guide. Annual account and card fees aren't the only types of fees banks charge. There are also fees for overdrafts, late payments, defaults on debt and foreign exchange. Because there can be hidden fees in the fine print only found in the terms and conditions, the best advice is to research and find a comprehensive list of all fees the bank charges.	Many credit unions offer transaction or checking accounts with no minimum balance and monthly fee. However, this will depend on the credit union in question. Unlike traditional banks, credit unions don't need to make a profit to continue operating. Therefore, one of their aims is to keep administrative fees as low as possible. However, this doesn't mean they can indefinitely run at a loss. Many credit unions will still need to cover key costs such as paying administrative and technical staff, preparing financial reporting disclosures and office building leases. While credit unions may have low fees relative to traditional banks, there may still be fees that credit unions charge to cover their ongoing overheads.
Interest Rates	While traditional banks and credit unions offer similar products, they differ wildly in the interest rates they offer on term deposits and mortgages, especially regarding mortgage rates. Banks tend to have higher interest rates on mortgages, particularly over a longer time horizon (3 years onwards), as they need to ensure they cover their downside risk and provide a stable return to shareholders. Additionally, banks will be taking on interest rate risk as they need to constantly adjust their rates based on what the Reserve Bank of New Zealand (also known as the RBNZ) is doing to the Official Cash Rate (OCR). For example, if Westpac offered a 5% 5-year fixed rate mortgage to clients, but the RBNZ subsequently raised the OCR by another 5% (that Westpac wasn't expecting), Westpac would have to take the short-term "loss" where other banks would be able to charge a higher rate.	Generally, credit unions provide lower interest rates on debt (such as car loans and mortgages) and higher interest rates on deposits (such as savings accounts and term deposits). Since credit unions operate as non-profits, they can provide higher interest charges on investments (e.g. savings accounts) and lower interest rates on borrowings (e.g. mortgages). Because credit unions don't need to make a "profit" for their members (like traditional banks), once they have covered their administration costs, they can pass on the profits they would have made back to their members, either in the form of higher returns on investments or lower rates on borrowing. Therefore, they aim to keep their interest rates on savings as high as possible while keeping their interest rates on loans as low as possible. By taking out a mortgage with a credit union, you'll likely pay less interest throughout your loan, which could result in thousands of dollars saved. Because of the clear advantage over traditional banks, the number of Kiwis that have access to these deals is limited (otherwise, everyone would try to get access to these deals). In addition, most credit union members have to meet minimum membership criteria that vary depending on the credit union.
Technology	Traditional banks tend to have more money to spend on improving their technology stack and mobile interface. Additionally, competition is fierce in the banking sector. Each bank is incentivised to have the most user-friendly, easy-to-use applications possible. For example, if one of the banks has a mobile app that is much faster and better than competitors, it may incentivise Kiwis to switch to that bank. Therefore, all banks are incentivised to invest heavily in the latest technology. Banks invest in technology through a variety of ways, including back-end infrastructure (to make it faster to make bank transfers), security and Know Your Customer (KYC) / Anti-Money Laundering (AML) protocols, online banking platforms, front-end mobile application updates, and account visualisation or analytics software.	The primary purpose of credit unions is to provide the most value to their members. Usually, this doesn't include having the most up-to-date technology. Generally, credit unions will be much smaller (with a significantly smaller budget to develop their technology stack), so a credit union's digital banking offering is likely to be limited. Credit unions can differ heavily by user interface and technology capabilities. Make sure to research the different credit unions' mobile banking technology, user interface and security before choosing which credit union to use.
Source of Funding	Traditional banks will raise capital from a variety of sources. The main sources of funding come from: New Zealand customers (primarily through deposits) New Zealand Businesses Offshore investors (shareholders and bondholders) Offshore corporations (sovereign wealth funds, pension funds, etc.) The New Zealand Government (such as borrowing from the RBNZ or the New Zealand Treasury) Generally, borrowing from New Zealand sources will be cheaper than borrowing from offshore investors and customers.	Generally, most credit unions source their funds exclusively from New Zealand sources. The money that you invest with a credit union (through savings accounts or term deposits) is kept within New Zealand and reinvested locally through either home loans or personal and car loans.
Financial Reporting and Profitability	While not all banks are publicly listed, many large incumbent banks are. For example, banks such as ANZ, Westpac, Commonwealth Bank (parent company of ASB Bank), and National Australia Bank (parent company of BNZ) are all listed on public stock exchanges. Publicly listed stocks will be obligated to report and file profit and loss statements each financial year, following regulations that all publicly listed companies need to follow.	While credit unions aren't publicly listed, all credit unions must be registered with the companies' office and follow the disclosure & financial reporting requirements set out in the Friendly Societies and Credit Unions Act 1982. One of the key requirements of this legislation is to file an annual return and financial statements within four months of the balance date. Find out more about a credit union's reporting requirements here.
Customer Service	Traditional banks have hundreds of thousands of customers, many of which interact with the bank daily or weekly at the minimum. As a result, it is almost impossible for them to provide a high-touchpoint solution to each one of their customers. To continue providing high-quality service without incurring huge expenses, banks have come up with ways to outsource some of this work. Some of the ways they do this include: Building and using chatbots to help sort issues Providing comprehensive online resources and FAQ sections for customers Outsourcing many preliminary issues to offshore call centres (that are much cheaper than having someone onshore respond) Have 24/7 technical teams to hotfix any issues that arise	Due to the tendency of credit unions to be much smaller, most queries or customer service requests tend to be manageable by the onshore staff at the credit union. In addition, this approach means you're much more likely to get a high-touchpoint, personalised service that listens to you and your specific needs rather than an automated chatbot or redirects from a traditional bank. Additionally, because credit unions are primarily set up to service and add value to customers, they likely have the time and incentive to ensure your issue is fixed. This approach contrasts with the approach of many traditional banks that will benchmark the speed by which they can deal with customer inquiries. The faster they can deal with inquiries, the lower the cost it will be to service customers (and more profits for their shareholders).
Likelihood of getting access to credit	Traditional banks are obligated to their shareholders and bondholders to maximise shareholder value, meaning one of the core principles will be not to lose money. Because of this, banks tend to be much stricter regarding who they lend to, how much they lend and the type of lending they engage in. For example, during periods of extreme volatility or increasing interest rates, a bank may decide to decrease the number of loans they approve in a given period or make the eligibility criteria for getting a new loan / refinancing an old loan much harder. This decrease in loan approvals has a two-fold effect of ensuring their existing "loan book" (the total amount of loans on their balance sheet) is robust and de-risked whilst simultaneously ensuring only the highest quality creditors are added to the loan book.	Generally, credit unions have more flexible borrowing standards compared to traditional banks. While credit unions also don't want to lose their members' money, they are much more willing to work with Kiwis with non-standard or unique financial situations (whereas a bank may just reject you outright if you don't fit their credit score or algorithmic model). If you're self-employed, for example, you may receive increased resistance from banks to get credit or loans. In contrast, a credit union may provide you with the same low-rate loans regardless of whether you're self-employed or employed by a corporation. This policy doesn't mean that credit unions are ignorant of risks. Instead, it signals that they will be much more flexible in who they lend to and their loan criteria process.

What are the Pros and Cons of Traditional Banks and Credit Unions?

Pros and Cons of Traditional Banks:

Pros of Traditional Banks	Cons of Traditional Banks
Better Financial technology.	Higher frictional costs and fees on financial products.
More convenient to use online (through online platforms and mobile banking applications).	Usually will offer lower interest on deposits (such as short-term savings accounts or term deposits).
A much broader range of banking, loan and retirement products.	Usually will charge higher interest rates on borrowing (such as mortgages, personal loans and credit cards).
Larger branch network and physical infrastructure (such as ATMs or branches) to withdraw and deposit money.	Poorer customer service.
More likely to have low/no fee options that suit younger Kiwis (such as children, students or graduates).	Lack of alignment. (banks will always put shareholders' interests over your customer's interests. So, for example, a bank's business model revolves around customers staying in debt and incurring interest expense - a bank's revenue.)
Better analytics and visualisation tools through bank platforms.	Historical track record of treating customers badly (charging dead customers, charging customers for products they don’t want or use, charging fees without telling customers).

Pros and Cons of Credit Unions:

Pros of Credit Union	Cons of Credit Unions
Generally provide lower interest rates on borrowing (such as mortgages, personal loans and credit cards), making it more affordable to buy homes or borrow for investing.	Fewer physical branches and critical infrastructure (such as ATMs or branches).
Generally provide higher interest rates on investment accounts (such as short-term savings or term deposits).	Limited financial technology and product innovation (such as mobile apps, APIs, share trading platforms, etc.).
Lower account and product fees.	Fewer financial products are offered compared to traditional banks.
Excellent / more customised customer service due to a lower number of members they need to service.	Stringent eligibility requirements to become a member of each credit union.
Source and provide funds locally, supporting the New Zealand ecosystem (rather than taking and sending money offshore).	Potential hidden fees in non-standard products.
More flexibility on loan application situations and protocols.	Credit unions may be slower to implement changes based on members' feedback due to the lack of incentive to keep up with competitors (unlike traditional banks that may lose customers if they don't stay ahead).
Members of credit unions get to vote on policies and decisions made by the credit union.	Credit unions with smaller balance sheets may be limited in their ability to loan applicants.
It's easier to get a loan with a credit union versus a traditional bank.	-
Profits do not drive credit unions and strongly focus on serving their community (whether through financial education or giving back to members).	-

Must-Know Facts about Banks and Credit Unions

While the New Zealand government doesn't insure deposits, legislation is currently being drafted in parliament and is likely to get approval and come into force in late 2023.

Many Kiwis wonder whether their savings and deposits held in traditional banks and credit unions are safe if those entities go bankrupt. Currently, there is no legislation in place that prevents Kiwis from recouping any money lost as a result of a bank or credit union going through bankruptcy or liquidation.

While there are no assurances currently made by the government, this doesn't mean that the government doesn't care about Kiwis losing their money. The RBNZ and the treasury have stringent protocols and procedures to ensure that the banks and credit unions operating in New Zealand take the appropriate steps to protect downside risk and not engage in overly risk-taking behaviour, and legislation is proposed to protect depositors.

Don't feel pressured to work with a certain third party, especially based on anecdotal evidence from friends and family.

Ultimately, who you decide to borrow or invest with comes down to personal preferences. The best choice is to do what works for you, not what others have done. Just because your friends have borrowed with Westpac or have savings with Unity doesn't mean you should follow them blindly.

Both banks and credit unions have their distinct advantages and disadvantages. Consider the relevant pros and cons before selecting which one you want to go with. Especially in home ownership, taking out a mortgage is one of the biggest financial decisions of your life. Make sure you're making the best decision for yourself, not just doing what everyone else is doing.

Shareholders of traditional banks may make decisions that benefit THEM rather than you as a customer. In contrast, the incentives are much more aligned in credit unions where the members ARE the "shareholders".

Many banks try to create the impression that customers come first regarding their services. However, while this may not be the case for every bank, we argue that banks will make decisions that ultimately protect their shareholders and bondholders rather than their customers. Therefore, it's important to remember this distinction when deciding which financial institution to join.

Frequently Asked Questions

Are credit unions safer than banks?

A commonly held perception is that because banks are larger than credit unions, they are safer, and you're more likely to get your money back in the event of bankruptcy. Additionally, larger banks may be "too big to fail", and the government may bail out these banks if something bad happens.
These perceptions may be true, but other considerations should be factored in. For example, in New Zealand, there is no guarantee that your deposits with a financial institution will be repaid in the event of bankruptcy. This reason alone a bank is no safer than a credit union. However, generally, most large traditional banks will have extremely rigorous risk management protocols that they have to follow as a regulated financial institution, ensuring that the bank has sufficient liquidity (money) on hand in the case of adverse market conditions.
Credit unions and banks have the same risk profile. You will still lose your money with both institutions if they enter bankruptcy. Anecdotally, banks may be safer than credit unions based on their size and rigorous risk management procedures, but this has varied historically.

How long is the loan process when applying through a credit union?

Loan processing times with credit unions vary depending on the type of loan you're looking for and the financial characteristics or complexity of the loan application.
Generally, you'd expect an outcome between two to ten business days after submitting your application. Then, the credit union will be in touch with the next steps around receiving funds if approved.

How can I close down a bank or credit union account?

Closing an account at a traditional bank or credit union usually involves contacting the bank (via a call or online customer service) to submit a bank closure request. Be aware that some establishments may require you to visit a physical branch to complete this process due to internal company KYC/AML regulations. However, others may let you start this process online.