Building Societies Adapt and Thrive

This article was first published in the Birmingham Post on 5 March 2007

What is the difference between a bank and a building society? No, it isn’t a dodgy joke. The answer is that while banks have to squeeze every last drop of profit out of their customers to pay their shareholders, building societies try to minimise the profit they make.

This is because building societies are mutual - they are collectively owned by the people who save and borrow from them – their members. This means that societies can put their members first in every instance; from the rates they offer, to customer services, through to their commitment to the communities from which they came.

But does this difference really matter? Life is hectic and complex; financial services even more so. Today, there are 8,500 mortgages and 4,000 savings accounts to choose from. Because banks have to add on average 35% more to their costs every year by paying dividends, societies can challenge them on price when it comes to savings and mortgages, keeping plcs more honest.

In recent years building societies have campaigned on behalf of consumers. Paying to take your money out of an ATM may well be the norm today if societies had not stepped in to fight the proposal by a bank to introduce charges. Nationwide Building Society has gone even further, leading the way in providing more free cash machines in deprived areas.

As a local boy myself (I grew up in Smethwick) I am proud of the role the West Midlands has played in the history of the building society movement. The earliest building societies were set up during the industrial revolution, to help people own a home of their own; by pooling funds to allow them to purchase land and build houses.

The first known building society was formed in 1775 in Birmingham and like most early societies was 'terminating', meaning the business was closed after all of its members had been housed. This changed when societies started accepting savings from people who did not want to buy a home, but wanted a safe place to invest their money. Societies then became permanent.

Over a hundred years ago people in West Bromwich, Stafford, Tipton and Cosely, Dudley and Coventry all set up local building societies. Today these societies are still serving their local communities, sticking to their founding principles of co-operative self help.

Stamp Duty is often a real barrier to getting a foot on the housing ladder. Given the fact that it was one of the reasons building societies were first set up it is not surprising that today, they are campaigning to help more people into homeownership.

The West Bromwich Building Society ran a phenomenally successful campaign called “Raise the Roof”, to raise the level of Stamp Duty to help its members. Partly as a result of this campaign, the Government announced in the 2005 Budget that it would increase the zero-rated stamp duty threshold from £60,000 to £120,000; in 2006 it announced a further increase to £125,000.

And if you like having a local branch, then you should be thankful building societies are still around today. In the last 12 years banks have closed 24% of their branch network and Post Offices have shrunk by 18%. In contrast building societies’ branch network has reduced by only 5%. This is partly because building societies have a different decision-making criteria for such closures.

As member-owned organisations, decisions need to be for the good of everyone.  In some cases this means keeping branches open, which would have been closed if owned by banks.  In other cases the money from closing branches which are not being used is reinvested into the society to offer better savings and mortgage rates, or opening new branches. The only form of branch sharing in the UK is by two building societies, run for the benefit of their members.  This is in contrast to the big banks which abandoned a branch sharing pilot.

It is not just my view that building societies offer the best deal. Last year, a Senior Policy Adviser at the consumer body Which? told MPs at the House of Commons “when you look at average rates over ten years on a mortgage, you find building societies will charge about half a per cent a year less than the banks.  The long-term average on a cash ISA is about 0.2% or 0.3% higher on savings rates as well.” 

Best Buy tables are independent and often see societies topping the charts because their products are the most competitively priced. In the last published Moneyfacts survey of all mortgage lenders, 10 of the top 20 best value lenders over 12 months were building societies. Only one high street bank made it into the top 20.

On savings, building societies took 12 of the top 20 spots in the Moneyfacts 2006 Mini Cash ISA Survey. Last summer, building societies took six of the possible nine top mortgage category spots at the annual Moneyfacts awards.

On savings, building societies have also been at the forefront of offering the Government’s new Child Trust Fund (CTF). This aims to give every child the chance for a better start in life by building a savings pot early. Every child receives a voucher for £250, for parents on benefits this rises to £500. To date 39 building societies are offering the CTF, including the Coventry, Tipton & Coseley and the West Bromwich.

Some people have asked whether building societies are more nineteenth century than 21st. Undoubtedly societies have been around for a long time, but over the last 150 years they have been able to adapt, responding to the needs of their communities, because they are close to those communities. For instance Sharia mortgages; advisers who can discuss products in the languages spoken locally; special first-time buyer mortgages; and savings accounts which support local football clubs can all be found in building society branches regionally. These changes are set to continue and that is a good thing. As for the future, well it is bright, thanks to mutuals.