There are certain differences between banks and building societies.
Banks have a major role in the financial system and the economy. One of the primary functions of banks are borrowing and lending money.
For example, a bank take deposit from you in return for an annual interest payment. The bank then uses these funds to lend loans to other people and companies. (While creating fiat money in this process!)
Building societies are alternative financial intermediaries to the banks. Building societies are mutual organisations that offer some of the services provided by banks. Including managing the deposit and loan operations.
Using a building society might be much more suitable for some people and offer notable benefits.
However, our brains are susceptible to mental shortcuts while making financial decisions.
A common one affecting consumer behaviour is the availability bias involves relying on information that can be retrieved from the memory most quickly. We’re assuming anything that comes to mind the easiest and feels familiar is the right and safest option.
Commercial banks have the upper hands because of their higher levels of public recognition.
For example, when deciding on the financial institution to open an account we usually go for the well-known banks. You may well have chosen another institution if you were better informed about them.
A study questioned 2,000 participants about the banks and building societies shows the effects of the mental shortcuts in real life. 73% of the participants said that they didn’t know the difference between a bank and a building society.
Some of them are missing out financial opportunities for sure.
Although we will discuss certain differences between banks and building societies, let’s sort out the safety issue up front.
There is no difference in terms of safety as long as your deposits are within the £85,000 Financial Services Compensation limit. Money held in both types of the financial institutions would be eligible for a compensation in case the firm fails.
Even if your savings exceed the limit, the safety of your deposit would depend on the specific bank or building society you choose.
What is the Difference Between Banks and Building Societies?
The main difference is that the building societies are owned by their members, who are also customers of the society. Building societies tend to be local, with a branch network focused on providing service to members in a particular area. In contrast, banks are owned by shareholders, who may or may not be customers of the bank.
Banks tend to have a national or international reach, with branches located wherever they can find customers willing to do business with them. As a result, building societies typically have a more personal relationship with their customers than banks do.
Both banks and building societies have advantages and disadvantages for their clients. Which one might be a better option depends on the needs and expectations about the financial services. Let’s discuss the key differences and see if the building societies could be a favourable option for you.
Banks Have External Shareholders
Banks and building societies have different structures. Banks are publicly traded on stock exchanges and have external shareholders.
This means that management of the bank needs to act in the best interest of their shareholders, not necessarily the customers. Otherwise it would create an agency problem.
One of the major sources of profits for banks is the spread between the interest rates of deposits and loans. A focus on profits for their investors might result in worse rates for the bank customers.
Building Societies Have Members
As opposed to banks, building societies are not commercial businesses. They are mutual institutions owned and run by their members. A key fact to remember is that each member actually has a say on how the building society is managed.
On the other hand, most of the members choose not to engage in any management activities of the societies. Members tend to treat their building society account just like any other bank account. Just keep in my that it is an option.
Banks Offer More Financial Products
Building societies usually offer a smaller range of financial services than banks.
As the banks have a profit driven approach banks generally aim to expand which comes with a focus on more ways to generate revenues. Therefore, banks have the advantage of offering a wider variety of financial products.
Banks Provide Flexibility
Banks embrace a more global approach. Branch networks of banks are scattered throughout the UK and sometimes around world.
Most of the building societies don’t have many branches and mostly operate on a regional scale. Only exception is Nationwide with more than 700 branches.
Banks Tend to Adopt New Technologies Faster
Building societies are at a distinct competitive disadvantage in terms of providing the latest technologies in financial services industry.
In order to attract modern clients and reduce expenses, banks move faster on adapting new technologies.
Offering new technologies is also important for the customer retention among the millennials and gen z.
Building Societies Have Better Interest Rates
Probably the most important advantage of using a building society is better interest rates.
Building societies tend to offer more competitive interest rates than banks as a result of several factors such as lower running costs and less focus on profits.
Furthermore, building societies required to source over 50% of their total funding from members. Since the credit crunch, building societies have had to rely even more on savers’ deposits.
This is another incentive to offer higher interest rates on savings accounts or lower interest rates on mortgages.
Average difference between interest rates can be between 0.5% to 1.5% which might sound small. However, compound interest rate can have a significant effect of the future value of any investment.
Conclusion
When it comes to financial decision making we are all prone to mental shortcuts. It is always the favourable to make the research if we are aiming to make the optimal choices.
Being well-informed about a topic gives us the optionality. Banks and building societies can be more appealing depending on your specific expectations from a financial institution.
You can make the right decision by weighing the pros and cons of banks and building societies.