Banks And Building Societies Explained In December 2023

In the United Kingdom, choosing where to place your money often comes down to two major types of financial institutions. These are banks and building societies. 

This article will evaluate the distinguishing features of these opposing establishments, allowing you to understand their unique characteristics. Here’s what you can expect:

– Acquire knowledge on the historical background of banks and building societies in the UK.

– Understand the operational differences between banks and building societies.

– Learn how these differences can impact you as a customer.

– Gain insight into the future prospects of banks and building societies.

Topics that you will find covered on this page

Background of Banks and Building Societies

Banks and building societies have been part of the UK’s financial landscape for centuries. Banks, including major high street banks such as Barclays, HSBC, and NatWest, emerged as financial institutions which provide a variety of financial services. 

They are typically owned by external shareholders, mainly focusing on profit maximisation. 

Alternatively, building societies came into existence with the Building Societies Act. Yorkshire Building Society and Coventry Building Society are examples of such institutions. It is important to note that they are mutual organisations. 

This means that they are owned by their members, rather than external shareholders. Their focus is typically on providing benefits to their members, instead of making profits.

Building societies, like Leeds Building Society and Chelsea Building Society, are regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The same authorities also regulate banks to ensure that all financial institutions operate within the law.

Although banks and building societies have distinct origins and ownership structures, industry consolidation has blurred some of the traditional distinctions. Several building societies like Halifax and Abbey National have converted to banks over the years. 

Other banks are now owned by listed entities, such as TSB and Virgin Money. However, it is essential to note that mutual building societies still maintain a strong presence in the UK market.

Banks vs Building Society

When deciding between a bank and a building society for financial services, it’s crucial to understand the differences. In the past, banks tended to have more branches than building societies. However, branch closures in recent years have reduced the footprint of many banks.

Building societies often offer competitive savings rates, sometimes higher than banks. For instance, Nationwide Building Society and Newcastle Building Society often have attractive rates on savings accounts and mortgages. This is a result of aiming to pass profits to their members. 

Finally, banks usually have a broader range of financial products than building societies. However, this doesn’t necessarily mean they are better. Instead, it depends on the specific needs of the customer.

Operational Differences Between Banks and Building Societies

There are several key operational differences between banks and building societies. Their structures can vary dramatically, despite the fact that they both offer financial products such as savings accounts, mortgages, and current accounts.

A bank is a profit-driven financial institution, owned by shareholders who expect a return on their investment. Banks, such as the UK Bank, also operate multiple websites and offer a wide range of services.

On the other hand, building societies operate as a mutual organisation. As they are owned by members, profits are generally reinvested into the business, or alternatively distributed amongst these members. This often leads to better savings rates and lower mortgage rates compared to banks.

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Comparing the Impact on Customers of Banks and Building Societies

Your choice between a bank or building society can have various impacts. For instance, if you value face-to-face service, you might prefer a bank due to their larger number of branches. However, if you’re looking for the best savings rates, a building society could be more beneficial.

The Financial Services Compensation Scheme protects both banks and building societies. Consequently, up to £85,000 of your money is safe. This is regardless of whether you decide to deposit it in a bank or a building society. 

Customers of building societies often highlight the high level of customer service. As mutual organisations, they are more customer-focused than profit-focused.

Future Prospects of Banks and Building Societies

The future of both banks and building societies in the UK seems stable. Banks continue to evolve, offering digital and mobile banking solutions. 

In addition, building societies like the Yorkshire Building Society and the Coventry Building Society are also working to meet customer needs by investing in digital platforms. 

In the face of growing competition from neobanks, fintech challengers, and digital disruptors, both banks and building societies will need to continue to innovate and improve their services. 

This means that customers can expect more tailored financial products, better customer service, and potentially, more competitive rates in the future.

Both banks and building societies face pressures from the shift to digital banking. As mobile and online services are now central to retail banking, technology investment and innovation is becoming a necessity. 

It is also important to note that open banking and Banking-as-a-Service could also disrupt traditional models. However, human interaction remains important for complex advisory services. 

Consequently, banks and building societies will need to strike the right balance between digital capabilities and human touchpoints.

banks vs building society

Exploring Commercial Banks and Credit Unions

Commercial banks and credit unions both offer a range of financial products to consumers, but there are notable differences between them. 

Commercial banks, like Virgin Money and Abbey National, operate to generate profits for their shareholders. They offer a variety of financial products, including savings and current accounts, mortgages, and credit cards.

Alternatively, credit unions prioritise serving their members as they are not-for-profit institutions. Much like building societies, they are owned by their members and profits are returned to them in the form of better rates and lower fees. 

In the UK, credit unions are becoming increasingly popular due to their community focus and competitive rates.

The choice between a commercial bank, credit union, or building society will depend on your individual needs and circumstances. Remember that each offers benefits and potential drawbacks, making it important to consider your options carefully.

"Savings accounts and mortgages are just two of the financial products that banks and building societies offer."

Understanding Financial Products

Financial products refer to the various services offered by financial institutions such as banks, building societies, and credit unions. These include everyday banking products like current accounts, savings accounts, mortgages, credit cards, insurance, and investment products. 

Remember that each institution offers its own range of products, typically tailored to the personal needs of its customers. 

For instance, a commercial bank like Virgin Money may offer a range of bank accounts, from basic current accounts to premium accounts with added benefits. 

Building societies, like the National Counties Building Society or the Ecology Building Society, often offer competitive mortgage and savings rates, as they aim to pass on profits to their members.

Before choosing a financial product, it’s a good idea to seek financial advice from a trusted source. This opportunity will allow you to comprehend the product’s terms, as well as evaluating whether it suits your personal needs.

Understanding Banks and Building Societies

The Benefits and Responsibilities of Becoming a Member

When you open an account with a building society, you become a member of that institution. This is different from being a customer of a bank. As a member of a building society, you have a say in how the society is run. 

This could be through voting at the annual general meeting or standing for election to the board.

Being a member comes with benefits. For instance, building societies, including the Loughborough Building Society, often offer their members better rates on mortgages and savings accounts compared to banks. 

In addition, membership comes with a further prioritisation of customer service, ensuring that members are happy with the products and services they receive. 

However, being a member also comes with responsibilities. You’ll need to keep your account in good standing and may be asked to participate in decisions about the society’s future. Before becoming a member, it’s important to understand these responsibilities.

The Role of the Building Societies Association

The Building Societies Association (BSA) plays a crucial role in the UK financial sector. It represents mutual lenders and deposit takers in the UK including all 43 UK building societies. 

As of 2022, building societies hold over £365 billion in residential mortgages, accounting for 18% of the UK market. They also hold £250 billion in retail deposits, representing 16% of the total market share. 

It is also interesting to note that they employ approximately 50,000 full and part-time staff, as well as operating through approximately 2,000 branches. 

The BSA’s primary purpose is to support and promote the interests of member institutions. It helps to influence legislation and regulations which impact building societies and their customers. The BSA also provides a platform for members to share information and best practices.

Membership in the BSA can provide building societies with a strong voice in the financial industry. Conversely, in order to enjoy the full benefits, members need to be actively involved in the association. 

The BSA’s work can have a direct impact on the services and products offered by building societies, and by extension, on their members.

Comparing Current Accounts of Bank and Building Societies

The difference between banks and building societies can also be seen in the current accounts which they offer. A current account is a type of bank account that allows you to manage your daily financial activities, such as receiving your salary, paying bills, and making transactions.

It is important to note that banks usually offer a wide range of current account options, with various features and benefits. 

These can include overdraft facilities, cashback on purchases, and access to preferential rates on other financial products. Using relevant ads is another key strategy which banks use to attract customers to their current accounts. 

Building societies, on the other hand, may offer fewer types of current accounts. However, they often offer competitive interest rates, particularly for members. They may also provide a more personal service, with a focus on customer satisfaction.

Whether you choose a bank or building society for your current account will depend on your personal needs and circumstances. Before making a decision, it is essential to compare the features of varying current accounts.

A Case Study On Navigating Current Accounts

To bring the comparison of banks versus building societies to life, let’s consider a case study. For those who are trying to make the best choice for their personal financial management, this example should resonate. 

Consider John, a working professional in his mid-30s. He has recently received a promotion and is looking to switch his current account. John’s primary goal is to maximise his saving potential, and he’s considering whether to go with a bank or building society current account.

To begin, John compares the offerings of different banks and building societies. He discovers that although banks provide a plethora of options, building societies offer fewer types of current accounts. 

However, building societies often provide higher interest rates on savings, aligning with his goal to maximise savings.

After diligent research and careful consideration, John decides to open a current account with a building society. He feels confident in his decision, knowing that this choice aligns with his current financial goals. 

His case emphasises the importance of understanding the differences between banks and building societies when making personal financial decisions.

Key Takeaways and Learnings

To wrap up our exploration of banks versus building societies, let’s summarise the key aspects of this topic. Here are some important points which you should make note of:

– Banks and building societies have distinct histories and structures. Whereas banks are profit-driven and owned by shareholders, building societies are mutual organisations owned by their members.

– The operational differences between these institutions affect the financial products which they offer, as well as their customer service approach.

– Building societies often offer competitive interest rates on savings accounts and mortgages, focusing on member benefits.

– Banks typically provide a wider range of financial products and services, offering a broader network of branches.

– Regardless of whether you choose a bank or building society, your deposits of up to £85,000 are protected by the Financial Services Compensation Scheme.

– Commercial banks, credit unions, and building societies each have their own advantages, with the best choice for you depending on your individual needs and circumstances.

– When choosing a current account, it’s important to compare the offerings of different banks and building societies. Consider your personal needs and the features and benefits of each account.

– As demonstrated in John’s case study, taking time to comprehend the differences between banks and building societies can guide your decision-making process.

By taking these key points away with you, it is possible to make informed decisions about whether a bank or building society current account is right for you.

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Meet the author

Jane Parkinson

Jane Parkinson

Jane is one of our primary content writers and specialises in elder care. She has a degree in English language and literature from Manchester University and has been writing and reviewing products for a number of years.

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