What are the fundamental differences between banks and building societies?

Photo credit: flickr.com

Photo credit: flickr.com

Increasingly, the landscape for savers post-Brexit is beginning to resemble a cold afternoon in Siberia. In what has been described as a ‘savings’ bloodbath’, rates have been culled after the Bank of England (BoE) reduced the base interest rate in a bid to stave off a seemingly inevitable period of recession.

NatWest is the latest bank to join in the slaughter, cutting its ISA and easy-access account rates to just 0.01%. This is less than most current accounts, with modern savers currently able to earn just £1 pound on a pot of up to £10,000. As a result, many are either abandoning their plans to save or simply seeking out alternative vehicles.

The Core differences between Banks and Building Societies

Of course, you will notice that building societies are largely absent from the widespread cull of interest rates. Despite this, such entities continue to fall victim of misunderstandings, as many fail to recognise the core difference between building societies and banks and how they can benefit from these. With this in mind, let’s take a look at some of these differences and consider them in closer detail: –

Banks are Governed by Share Holders

On a fundamental level, banks are commercial entities that are listed in the stock market and answerable to shareholders. In contrast, building societies are mutual organisations that were first established in the 1800s, in order to help communities grow and make it easier to borrow and save money.

There is a clear distinction here, and one that has stood the test of time right into the modern age. These most important aspect of this is that building societies are governed by the people who hold their money there, rather than shareholders who must take steps to ensure that their banks remain profitable.

In this respect, savers are less likely to experience widespread rate cuts and will have far greater access to viable returns.

Building Societies tend to offer higher savings Rates

While building societies are not immune to national interest rate cuts, they are able to absorb such monetary decision making without impacting too heavily on their customers. This is reflected in the current climate, where despite the turmoil the Saffron Building Society continues to offer fixed savings accounts with rates of between 0.80% and 0.90%.

While you may argue that this is not exactly what savers have in mind, it is still consistently higher than the average high street bank and therefore capable of offering some solace during difficult times. Given this and the greater accessibility of building societies when it comes to borrowing, it is somewhat surprising the banks continue to dominate the savings market in the UK.

Building Societies Operate in a Less Competitive Market

In order to be balanced, it is important to note that building society customers cannot benefit from the intense level of competitiveness that exists between banks. This negates the presence of shareholders to some, small degree, as the natural competition that exists in the sector forced service providers to organically increase their savings rates in order to secure more business.

In contrast, many building societies choose to demutualise and become banks following a changed in government legislation during the 1980’s. This has left fewer mutual societies on the market, meaning that savings rates will remain relatively stable and consistent regardless of the economic climate. Of course, this is good news during times of austerity, but more problematic during an economic boom when banks are able to offer significantly higher savings rates.

This is an important consideration, and it is always sensible to compare the market before making an informed financial decision.

from Finance Girl http://www.financegirl.co.uk/what-are-the-fundamental-differences-between-banks-and-building-societies/

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