Banks vs credit unions vs non-banks: what’s the difference?

In Australia, there are hundreds of different financial institutions that offer home loans, with many also offering credit cards, savings accounts and term deposits.   

These institutions generally belong to one of three categories:

• Banks (i.e. retail banks)
• Customer-owned banks (mutual banks, credit unions, building societies etc.)
• Non-banks

Let’s explore some of the differences between each of these.    

What is a bank? 

In Australia, a bank is a financial establishment that is licenced as an authorised deposit-taking institution (ADI) through the nation’s banking regulator, APRA (the Australian Prudential Regulation Authority). Having an ADI licence means the institution is authorised to accept customer deposits, such as by offering savings accounts or term deposits.

Licenced banks can be further classified as either customer-owned banks (also known as mutual banks) or retail banks. We’ll cover customer-owned banks in the next section, so we’ll focus on retail banks here.  

Retail banks, such as the big four (ANZ, Commonwealth Bank, NAB and Westpac) are for-profit businesses, which means they operate to generate profits for shareholders. 

Outside of the big four, some of the biggest retail banks in Australia (in terms of deposits under management) are: 

1. Macquarie Bank
2. Bendigo and Adelaide Bank 
3. ING
4. Suncorp 
5. Bank of Queensland
6. HSBC
7. Bank of China
8. Rabobank 
9. Citibank 
10. AMP 

Some of the most well-known institutions in Australia are also owned by the big four banks. For example, Commonwealth Bank owns Bankwest, NAB owns popular online bank UBank, while St. George, Bank of Melbourne and Bank SA are owned by Westpac.

As we discuss below, the retail bank sector is far larger than the not-for-profit, customer-owned sector. 

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What is a credit union? 

Credit unions and building societies are traditional examples of customer-owned banks. As the name suggests, customer-owned banks (also known as mutual banks) are ADIs that are owned and operated with the sole purpose of providing banking services to members (i.e. customers) rather than generating a profit.  

The ‘credit union’ and ‘building society’ labels have become somewhat archaic in recent years after regulatory restrictions over the use of the term ‘bank’ were loosened. Since these rules were relaxed, many ADIs have dumped these labels in favour of having ‘bank’ in their name (as you can see below). So aside from history, there is now little (if any) difference between a credit union, building society or mutual bank these days. All operate with a customer-owned structure as their business model.            

According to the Customer Owned Banking Association:

Customer owned banking aims to challenge the dominance of the major banks across the country. 

The sector still has a fair way to go though. When it comes to total assets, the entire customer-owned banking sector holds just over $117 billion, which is only 2.4% of the total assets across all ADIs (according to KPMG’s Mutuals Industry Review 2018). In comparison, the retail banking sector makes up 97.6%, or $4 trillion of total ADI assets. The big four banks alone have assets totalling about $3.6 trillion

Top 10 credit unions in Australia

There are more than 70 customer-owned banks in Australia. The biggest (by total assets) according to KPMG’s 2018 report are: 

1. CUA
2. Newcastle Permanent 
3. Heritage Bank (formerly Heritage Building Society)
4. People’s Choice Credit Union
5. Teachers Mutual Bank (formerly Teachers Credit Union)
6. Greater Bank (formerly Greater Building Society) 
7. IMB Bank (formerly Illawarra Mutual Building Society)
8. Beyond Bank (formerly Community CPS)
9. Bank Australia (formerly Members and Education Credit Union)
10. P&N Bank (formerly Police & Nurses Credit Society) 

Source: KPMG

What is a non-bank? 

Non-bank lenders (often referred to as shadow banks) are financial institutions that don’t hold an ADI license, meaning they can’t offer deposit products such as savings accounts, transaction accounts, term deposits or offset accounts. Non-banks, therefore, source the funding for their loans from wholesale investors, either within Australia or overseas.

They are can still offer loan products to people, like home loans, but they are not regulated by APRA (the Australian Prudential Regulatory Authority). However, non-banks are still governed by the National Consumer Credit Protection Act (NCCP) which is administered by ASIC (the Australian Securities & Investments Commission).

Non-bank lenders in Australia

Some non-bank lenders you might have heard of include: 

• Firstmac 
• Liberty 
• Pepper Money 
• Resimac 

There aren’t as many non-banks out there now compared to the 1990s and the early 2000s. Following the GFC and the resulting credit squeeze, many were forced out of the market or swallowed up by larger lenders.

Which is better: credit unions, banks or non-banks? 

There’s no definitive answer to this question since no two banks or lenders are the same – no matter if they’re both retail banks, customer-owned banks or non-banks. 

When looking for great-value loans and deposit products on the market, you’ll see a mixture of retail banks, customer-owned banks and non-banks all offering some of the best interest rates. See for yourself:

• Low home loan interest rates
• High savings account interest rates
• High term deposit interest rates

Similarly, at the other end of the market, a mixture of retail banks, customer-owned banks and non-banks also offer some of the worst-value products. Fierce competition on the market forces institutions of all types to offer good value products – otherwise, they risk falling behind and losing customers.

So don’t ever buy into stereotypes or broad generalisations about retail banks, customer-owned banks or non-banks. Focus on comparing financial products on their rates, fees and features rather than the type of institution that’s offering them.     

Are credit unions and non-banks safe?

Customer-owned banks (be they a credit union, mutual bank or building society) and non-banks can be just as safe as any retail bank. Customer-owned banks are registered ADIs, so just like the big four banks, they are covered by the Australian government’s deposit guarantee of up to $250,000 per customer.

So in the rare event that a customer-owned bank collapsed (the last Australian bank to collapse was in 1931), APRA would pay customers back up to $250,000 of their money. 

Also, no matter whether you’re borrowing from a non-bank, customer-owned bank or retail bank (all holders of an Australian credit licence), every consumer in Australia is covered by the NCCP (National Consumer Credit Protection Act) which is enforced by ASIC. Non-banks and customer-owned banks are also bound by Australian Consumer Law, Privacy Law and the ePayments Code, just like retail banks.

However, customer-owned banks and retail banks (ADIs) have APRA’s regulations on top of these, whereas non-banks don’t. But this doesn’t suggest non-banks are any less safe to borrow from – APRA’s regulations are generally designed to maintain the stability of the banking industry as a whole, rather than protect individual borrowers.

APRA’s rules can restrict the types of lending that ADIs can conduct. For example, in 2014 APRA introduced a “speed limit” that restricted the amount of investment home loans that ADIs could issue, which forced many ADIs to hike interest rates on investment home loans. But since these restrictions did not apply to non-banks, many non-bank lenders were able to maintain competitive interest rates on investment home loans.                 

There’s a perception that non-bank lenders have “looser” lending standards than ADIs, but that’s not necessarily true. While some are more flexible with who they lend to, such as self-employed workers and those with fluctuating credit histories, it is still within a non-bank lenders’ best interest to have strong lending standards. Some non-bank lenders often have stricter standards than many ADIs – for example, you’ll find many non-bank home loans that are restricted to borrowers with a deposit of at least 20%.   

So as long as the lender you’re borrowing from holds an Australian credit licence (legally required to provide loans in Australia), rest assured that consumer borrowing protections are in place. Don’t buy into any myth you might hear about how ‘only the big banks are safe’. 

Savings.com.au’s two cents 

At the end of the day, the organisational structure of a financial provider shouldn’t really matter on a product-level. Bigger banks might have a broader range of products or more staff to help, but the main thing you should be focusing on is what you’re after in a product, whether that’s good rates and fees, convenience and good online functionality, or a combination of everything.

That’s why it’s up to you to do your own research and make sure you include all types of institutions in your parameters when comparing financial products. Don’t limit yourself to only choosing products from major banks or only from small customer-owned banks, because you could be missing out on better value products.

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