Many people in the United Kingdom are confused as to the difference between banks and building societies, from their roles to their ethos to the way they are run. They tend to imagine that they are essentially one and the same, or to discount building societies entirely on the basis that they simply don’t understand their function. However, building societies have many advantages for those who understand what they do and how they can benefit them.
Understanding the Differences between Banks and Building Societies
In England and Wales today, there are roughly 11,250 branches of banks, with a further 1,500 in Scotland. The ‘Big Four’ London clearing banks alone hold a little over £160 billion of sterling deposits, including £121 billion of current account money. Comparatively, there are far fewer building societies scattered across the country. The Building Societies Association boasts 172 members with 6,500 branches and a total of £170 billion in customer deposits – little more, combined, than the four largest clearing banks in London.
On this basis, it is easy to imagine that building societies are the poor relation, but is this true? To answer, it is important to understand how they differ.
The purpose of building societies is to provide a system of finance for home ownership. Unlike banks, they are not run for profit, and due to their altruistic purpose and the economic benefits they offer the country as a whole, they profit from a system of tax relief enforced by the Government. Building societies face a prohibition on any loan-making that is not connected with house finance. The vast amount of money that they do lend is drawn from saver’s deposits within the society, in the form of share accounts similar to a current account in a bank. The societies are owned by those who invest in them, who are given a vote at annual meetings organised to discuss matters of the society.
The Benefits of Using a Building Society
Unlike the current accounts offered by banks, building societies like Saffron pay the quoted interest rates for their savings accounts with tax already deducted. This means that they can offer highly competitive bank deposit rates, which is one of the main factors attributed to their growth in popularity over the last decade.
In addition to their share accounts, most societies offer a tax-deducted higher interest rate fixed-term account option. Recent years have seen most rapidly expand their offerings package, broadening the range of facilities they offer their customers to make them more competitive. This has been supported by an aggressive marketing policy to increase their client base. City centres have seen the introduction of cash dispensers for many building societies, and some have joined forces with banks to create cheque websites or credit cards, or to offer insurance related schemes.
A more radical departure still could also be in the offing. A group of societies in the BSA recently proposed that they be given the power to act as estate agents, acquire an interest in a bank or insurance company, make personal loans, carry out surveys of land for development, operate in EEC countries and offer index-linked mortgages, all of which would rapidly expand the functions of building societies and afford them a more prominent role in society. The radical nature of these proposals suggests that it will be some years until they bear fruit, yet they demonstrate a more current change in function, indicating how barriers to their participation in the high street are being broken down, their traditional role changing to ensure that they retain their relevance in contemporary society.
A further, practical advantage to building societies is often overlooked; their opening hours. The majority of building societies operate between 9am and 5pm on weekdays and at least part of the day on Saturdays. Bank operating times are far more restrictive, with most closing for business between 3 and 3.30pm, and only some open on Saturdays.
For the savvy, it is well worth considering how these differences between banks and building societies affect you as a customer, and whether, in fact, it is a building society that would better benefit you financially.