Building societies or banks: what you need to know
Thanks to the recession, your average consumer in the UK can boast considerably better financial knowledge than a decade ago. The growth of online comparison websites also means that people are much more aware of their options, and how much money they can save simply by doing a little research.
However, many consumers are still confused about one thing: the difference between a bank and a building society. What is it exactly that makes a bank different from a building society – and should we be choosing one over the other?
The difference between a bank and a building society
Conventionally, the main difference between a bank and a building society is its shareholders. Banks are listed on the stock market and are owned and run for the benefit of its shareholders. These shareholders are paid dividends from the bank’s profits.
Conversely, as this article from consumer website Love Money explains, a building society has no external shareholders. People who hold mortgages and accounts are counted as building society members who get to vote on its actions.
But this traditional divide between banks and building societies was turned on its head during the economic reforms of the 1980s. These reforms made it possible for banks to offer mortgages to consumers, a domain that was previously held by building societies. Simultaneously, building societies were allowed to offer traditional banking products, like current accounts, as well. Some building societies, like the ill-fated Northern Rock, eventually demutualised into banks.
Today, the primary difference between a bank and a building society is how they borrow money. Banks depend on wholesale money markets for their funds. Building societies also borrow money from these wholesale markets, but aren’t allowed to get more than half of their funds in this way. Since the credit crunch, both banks and building societies have had to rely more strongly on savers’ deposits too.
So while banks and building societies have essential differences, their range of consumer offerings is largely similar. Whether you choose to join a bank or a building society will depend on your particular financial circumstances, and the deals offered by each at any given time.
Joining a building society
If you’re thinking about joining a building society, it’s important to consider this decision in the same way you would joining a bank. Think about what you want – for instance, a high interest savings account, a new current account or a first-time mortgage – and look for providers who offer the best rates for you.
Financial comparison sites like Go Compare and Money Supermarket are always a good starting point. But if a particular building society catches your eye, it’s a sensible idea to look at their website directly as well, as some offers may not be advertised on comparison websites.
Additionally, don’t just assume that your money is safer in a building society. Check that the institution you favour is FSA-regulated and that your money will be covered by the Financial Services Compensation Scheme, which insures deposits up to £85,000 per person and investments up to £50,000 per person.
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