A common thread in the debate over how to regulate the financial sector is the claim that protecting borrowers will lead to higher fees and less service -- a kind of financial blackmail against reform-minded progressives. Like false automaker claims that new emissions standards would be extremely expensive to reach, it's hard to believe that commonsense consumer protections would destroy a firm's business model. (Conversely, any firm that depends on ripping people off doesn't really have a business model we want to preserve.) Now, two economists have done an interesting comparative study between credit unions and credit card companies and determined that it is indeed possible to make money without oppressive fees.

We found that credit unions are less likely to charge the fees and penalties that the new act hopes to eliminate — and when they do, they charge less than other issuers.

While virtually all banks and other for-profit issuers increase the interest rate if the borrower fails to make a minimum payment on time, most credit unions do not. Similarly, credit union fees for exceeding the credit limit are on average just half those of other issuers. But contrary to industry assertions, more responsible card users don’t pay the price. Credit union cards actually offer lower annual fees and longer grace periods than regular cards.

Is the lending model used by credit unions feasible for banks and other issuers? Absolutely. Banks and credit unions compete for customers in the same market. The primary distinguishing characteristic of credit unions is that they answer to a different group of owners: profits that are not reinvested are paid to the union’s shareholder-customers as a dividend, much as investor-owned banks reinvest or pay dividends to their shareholder-investors.

And now I want to join a credit union.

-- Tim Fernholz

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