Banks, mutual banks and credit unions - what’s the difference?

Maybe your parents opened one for you when you were little, or maybe you opened one for yourself just before you received your first paycheck. Regardless of how your first bank account came to be, it is highly unlikely that you thought too long and hard about how the financial institution you were joining was structured.

You might be wondering even now, why it matters whether you’re with an actual bank or a credit union. As long as your money is safe, what difference does it make?

Different financial institutions offer different interest rates, perks and benefits, meaning that some will be more suited to your individual needs than others. For instance, if you’re trying to boost your savings, then you might be able to find a more competitive interest rate with a customer owned bank or a credit union. Or, if convenience is your main concern, it might be easier to stick with a major bank. That way you can feel confident in the knowledge that you’ll be able to find a physical branch, in most places in the country.

Then there’s the question of the things you care about. What are your values and does your current financial institution align with them? If you want to support your community then you might be interested in joining a local credit union.

Whatever your money motivations, the first step to being financially savvy is to fully understand how the place that you’re keeping your money in, actually works.

Simply put, banks are for-profit institutions that accept monetary deposits and give out loans to individuals and businesses. 

In a more non-traditional sense, banks nowadays also often offer insurance, trade in financial markets and are involved in stockbroking and funds management.

In Australia, banks can vary greatly in size from the big four, which operate in every state and territory and are each worth billions of dollars, to smaller banks that only offer services in certain states and have a lot fewer assets.

One of the reasons for this huge difference in size is that the bigger a bank gets, the more capital it has and the more likely it is to buy up smaller banks and institutions. 

In fact, with the deregulation of the banking sector in the early 1970s, banks and credit unions were merging all over the shop. The bigger banks were getting bigger and bigger and the smaller banks were vastly disappearing. In response to this, the Australian government brought in the ‘four pillars policy’ in 1990. The policy was put in place to stop Australia’s four biggest banks, ANZ, Commbank, NAB and Westpac from merging with one another.

A bank is a publicly listed company that is generally owned by private investors and stockholders. These investors or stockholders can either be individuals or other companies. As mentioned above, some banks are even owned by bigger banks. St George Bank and Bank of Melbourne, for instance, are both subsidiaries of Westpac.

Besides earning a piece of the profit pie, the shareholders, whether they be individuals or companies, each have a say in matters relating to the bank. The more shares one person or company owns, the more of a say they have in how the bank is run.

Otherwise known as a ‘customer-owned bank’, a mutual bank is basically a credit union that has gone through an approval process to call itself a bank. The process of becoming a mutual bank usually starts with a vote from the board members. If the majority vote yes then the institution will apply to the Australian Prudential Regulation Authority for permission to change its name to ‘mutual bank.’

Mutual banks offer similar, if not the exact same services as a bank, including general deposit accounts, loans and insurance.

When it comes to ownership, mutual banks are more aligned with credit unions than they are with banks. This is because a mutual bank is owned by its customers, meaning it doesn’t have shareholders. In fact, the difference between credit unions and mutual banks is more cosmetic than anything else.

One reason more and more credit unions might be calling themselves ‘mutual banks’ these days is to build up their brand and attract more customers. Just as Google has become synonymous with the internet, the word ‘bank’ has become almost one and the same with personal finance.

By becoming a ‘mutual bank,’ a credit union maintains its mutual structure and community focus, while at the same time building up its brand as a trusted financial institution.

In terms of the financial products and services provided, credit unions really aren’t that different to banks and mutual banks. Most credit unions these days offer everything from standard deposit accounts to car loans, home loans and insurance.

The point of difference between banks and credit unions is really in ownership and the area in which they operate.

As mentioned above, both credit unions and mutual banks fall under the ‘customer owned’ umbrella. This means that, unlike a bank, a credit union is owned by its customers. So, when you open an account with a credit union you become a member. 

As a customer-owned institution, the profits for a credit union do not go to private shareholders but instead back into providing more benefits for members, including making rates and fees as low as possible.

Credit unions often operate in smaller areas than banks and just like banks, can vary in size. For instance, some larger credit unions operate across multiple states, whereas others will focus their business solely on one area or region.

The one thing banks, mutual banks and credit unions have in common is that they must all have an authorised deposit-taking institution licence (ADI for short), in order to legally operate under any of these three titles.

All ADI licences are approved and administered by the Australian Prudential Regulation Authority and all authorised deposit-taking institutions are subject to the same prudential standards. This means that Australian banks, mutual banks and credit unions must all adhere to the same banking code of practice.

As authorised deposit-taking institutions, banks, mutual banks and credit unions are all part of the government’s financial claims scheme. This means that in short, they’re all pretty much as safe as each other.

The only financial institutions that are not covered under the financial claims scheme are those that do not have an Australian ADI. These could include:

• Branches of Australian banks, not located in Australia
  
• Financial companies and institutions, not licenced by the APRA
  
• Branches of non-Australian banks, located in Australia with an ADI licence from another country

The type of financial institution you choose to put your money with will really depend on what matters most to you. For instance, if you’re after a super low rate on your home loan, then your decision may be purely product-driven. In this case, you probably won’t be too fussed whether you end up with a credit union or a bank.

Or if you’ve been burned by bad customer service before, then you may be more inclined to go with a smaller bank, mutual bank or credit union. If you do all your banking online, then you may be on the hunt for a financial institution with a more streamlined app. Bearing in mind that bigger doesn’t always equal better tech. ING and UP both received the best Mobile Banking Experience awards in the 2022 Mozo People’s Choice Awards for best Banking.^

Want to read more before you make your decision? Head to Mozo’s financial institutions page for a list of banks, mutual banks and credit unions operating in Australia right now. You can even read reviews from Mozo and customers on each institution’s page. 

^For the Mozo People’s Choice Banking Awards, Australians shared their opinions on different bank providers. This included expectations and experience across a range of areas from trustworthiness to customer service. You can read more about the 2022 Mozo People’s Choice Awards for Banking here.