Banking: Big Little Lenders

Robert Kerley used to keep his money with a big national bank, and every time he visited his branch, he felt like a walking account number. Tellers rarely greeted him by name, as he had come to expect in Winona, Minn., a town of 27,000 where people tend to know one another. And despite being a longtime customer, he would be fingerprinted with invisible ink when he wanted to make multiple transactions.

A supervisor at a small electronics firm, Kerley, 42, was looking for a homier bank when his teenage son told him about a community credit union called Affinity Plus. Kerley had never heard of it. But he joined, and he now sees no reason to bank elsewhere. "I pay lower fees and get better interest rates," he says. "And they don't ask for my fingerprint."

Thanks in good measure to disenchanted bank customers like Kerley, the fortunes of credit unions have turned for the better. Long content to quietly serve a single workplace or small community, credit unions had emphasized friendly customer service while seeming oblivious to shifting customer needs. Recently they have realized that they must evolve and grow--or perish--and many are meeting the challenge with services such as online banking and a nationwide ATM network. Federal rules intended to promote the industry's expansion recently took effect and should enable credit unions to compete even better against banks.

With $570 billion in assets, up 29% in the past two years, credit unions have grown at about four times the rate of the $8 trillion commercial-banking industry. And as credit unions have steadily consolidated, membership has risen annually, to 83 million clients today. "Banks take the consumer for granted--and for an awful lot of money," says Dan Mica, president of the Credit Union National Association, the industry's largest trade group. "They are tacking on fees and have less interest in serving small businesses than they used to. We're filling the vacuum."

If you're confused about what a credit union is, you're not alone. The institutions, which date to the mid-1800s, took off during the Great Depression as not-for-profit, tax-exempt organizations through which workers in a company could pool their savings to qualify for loans for cars and other big-ticket items. About 10,000 exist today. The Navy's is the nation's largest, with 1.25 million members, while some have fewer than 500 members. Roughly 60% of credit unions are federally chartered (the rest have state charters) and supervised by the National Credit Union Administration. Nearly all, including state-chartered credit unions, are federally insured. Most provide the basics (checking and savings accounts, credit cards and home and car loans), and they tend to offer lower fees and loan rates than banks, and higher returns on deposits.

Until recently, the trade-off for such goodies was that most credit unions were less convenient in some ways than banks. But many today offer nationwide ATM access through a surcharge-free network formed with other credit unions (most also offer ATM access through commercial banks' networks). Moreover, as banks have raised fees to shore up profits in a weak economy, credit unions seem to be benefiting from a consumer backlash.