What Is a Financial Cooperative?

A financial cooperative (co-op) is a member-owned, nonprofit financial institution that operates under a members-first philosophy to serve a population’s banking needs. A financial co-op may be able to offer lower fees and better rates because they are not seeking profits to return to investors. 

Cooperatives are important organizations for the world’s economy. Here’s what they are, how they work, and what contributions they can make to their local communities. 

Definition and Examples of a Financial Cooperative

The defining characteristic of a financial cooperative (co-op) is its structure, which is typically member-owned and governed rather than investor-owned—a unique characteristic for a financial institution. The most common types of financial cooperatives are credit unions and cooperative banks. They’re often locally-owned and operate as nonprofits. They also tout their values and customer-centric business model. Financial co-ops return revenue to members in the form of lower rates, fewer fees, and higher dividends.

Cooperatives do not take the same risks as shareholder-owner banks because they are not after large profits. Thus, while many large banks suffered incredible losses during the financial crisis of 2008 and beyond, co-ops were able to come out stable and strong. In fact, co-ops kept growing steadily during that time period. 

• Alternate name: Cooperative financial institutions, credit union
• Acronym: CFI

A credit union is an example of a financial cooperative. Credit unions were originally established to serve people with the lowest incomes in North America and developing countries. The purpose of these financial cooperatives is greater financial inclusion. 

How a Financial Cooperative Works 

It’s fairly simple to become a member of a financial cooperative. Once a new customer opens a savings account, they become a member of the co-op. 

It’s common for a credit union to require the following to open a savings account and become a member:

• New member fee
• Minimum savings deposit
• Social security number (or ITIN or EIN)
• Address (some co-ops require customers to live in the area they service)
• Government-issued photo identification

As a member, the new customer is able to apply for loans and other banking products at the co-op rates. 

Because financial cooperatives are owned by members instead of outside investors, they don’t have the same pressure to deliver profits. When a member applies for a loan, for example, they may be able to secure an interest rate lower than what a bank with investors would offer. 

Notable Happenings

The United Nations (UN) named 2012 as the “International Year of Cooperatives. Financial cooperatives were recognized as a major contributor to socio-economic development, especially in regard to poverty reduction, employment generation, and social integration. 

The UN passed a resolution to encourage all member states to raise awareness about the impact financial cooperatives have on social and economic development. It also sought to promote the formation and growth of cooperatives as cooperatives create a more inclusive financial environment, as well as encouraged governments to create policies, laws, and practices that were conducive to the formation of cooperatives.

Cooperatives have also been recognized for their resilience in the face of the 2008 global financial crisis. Cooperatives are able to continue extending credit to members, particularly to the small- and medium-sized enterprises during difficult times. 

Financial Cooperative vs. Financial Institution

Although a financial cooperative is considered a financial institution, it distinguishes itself from most other financial institutions in the way it is structured and the way it makes money. While financial cooperatives are owned by members who have one vote each, financial institutions are owned by investors.

This important distinction changes the way each organization operates. Most traditional financial institutions are publicly traded entities and must satisfy investor demands to earn profit. FInancial cooperatives do not have investors to satisfy and instead work to meet members’ needs instead. There are some other key differences between the two.