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.

Emblematic of this trend is Beaverton, Ore., credit union First Technology, whose motto is "Banking outside the box." First Tech's 116,000 members include thousands of young workers from firms such as Microsoft and Intel. On its website, members can do basic banking, apply for a mortgage or learn about insurance. "I probably visit the site every day," says member Erin Mulkins, 25, a manager at a mortgage broker who does all her banking at First Tech. "When I have a question about my account, I call, and I'm told immediately what's going on." Mulkins also earns 1.5 percentage points more on a three-year certificate of deposit than she would at a bank.

Under the new rules, it will be easier for federal credit unions to expand from serving workers at a single company to serving others in the same industry. Walt Disney's credit union, which had been restricted to Disney employees, their families and affiliated firms, may now apply to court any worker in the entertainment business in Los Angeles; Orlando, Fla.; or anywhere else that the credit union has a branch. Credit unions chartered to serve bundles of companies may expand to a new company simply by installing an ATM; previously a full-service branch was required. And the government has streamlined the application process for credit unions that want to serve whole communities, restricted only by, say, the county line or the borders of a metro area. Currently 885 federal credit unions have such community charters, and hundreds more are expected to apply for one.

For many credit unions, expansion is no longer just an option. "It's become a question of grow or die," says Tom Glatt, an independent industry consultant based in Sedona, Ariz. Credit unions have long called themselves the best-kept secret in banking, but they are currently looking more and more like for-profit businesses. In Colorado, six credit unions formed a trust company in 2001, and one of its members, Bellco in Greenwood Village, offers everything from investment advice to mutual funds, annuities and insurance. "We're trying to create an image that we're a full-service financial institution," says Bellco CEO Doug Ferraro, 41. "Big banks are marketing to the wealthy, and middle-income people are being underserved."