What’s The Difference Between a Bank and a Building Society?

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When asked what the difference is between a bank and a building society, lots of people might respond with “Wait, there’s a difference?”

Don’t worry if the above is your initial response. When asked what the difference is between a bank and a building society, surprisingly, not many people actually know! 

The next question is then usually: “Does it even matter?”

To give you that answer, this article will look into the difference between the two, and provide you with some general guidance as to which one might be better suited to your financial situation. I worked for a major bank for almost a decade so I’ve seen up close what a bank does, and how it’s often very different to what a building society does.

The main difference? Banks are owned by external shareholders, whereas building societies are owned by their ‘members’

The most significant disparity between a bank and a building society is that external shareholders own banks, whilst building societies are owned and run by internal ‘members’. 

For most major banks, this means that they appear on the public stock market such as the London Stock Exchange, so anyone can buy shares in them. This means that one of its main objectives is to pay dividends (a percentage of its profits) to its shareholders. As a result, most of its major decisions are focused on making a profit.

In contrast, building societies are not listed on the stock market (nor do they have private shareholders) and therefore have no external shareholders. They are instead owned and run by their members. To become a member, you must apply to the building society which will first review and then approve your application.

More commonly, anyone who opens an account with a building society will usually automatically become a member.

Why does this difference between a bank and a building society matter?

Having external shareholders or internal members owning the majority of a financial institution largely affects its aims and how it’s run. 

If you’re an external shareholder, you’ll likely only possess small parts of a bank, meaning it’s unlikely that you’ll have any meaningful say in its decision making. You will, however, receive any dividends that the bank may pay out.

On the other hand, building society members have more direct input in the institutions’ decisions. 

What does that look like in practice? As an example, I’m a member of Nationwide – the largest building society in the U.K – as I have a bank account with them. When they are going to make a significant decision, I receive a letter informing me of it as well as the option to vote in favour or against it. 

What are the advantages of a bank over a building society?

Some of the differences between a bank and a building society means that, as a customer, there are some advantages from banking with a bank. We’ll look at these now, but whether a bank is more suitable for you over a building society will depend on your individual preferences.

They tend to be more commonly available

One of the significant advantages of banks is that they are simply more prevalent. The most popular ones are available in branches across most of the U.K.

However, with the above being said, the rise of the internet and online banking has increasingly made branches more redundant. So, perhaps this is not as advantageous as it once was

Banks tend to offer a broader range of financial products

Due to their usually expansive nature, banks tend to offer more modern financial products than building societies. For instance, they typically provide a greater selection of personal current, saving and investment accounts, in addition to more types of business accounts. Building societies, in contrast, tend to be more limited in this way. 

Banks are also able to take part in investment banking and trading activity, which tends to be riskier. This is less relevant for the everyday customer, but larger businesses will likely prefer banking with a bank over a building society to have access to investment banking products and services.

Banks tend to offer more up-to-date financial technology

Banks’ financial technology, or fintech, is typically more modern and up-to-date. For example, mobile banking was introduced and led primarily through banks. Contactless cards were also first implemented by banks.

There are also an increasing number of digital challenger banks springing up in the UK. These are often app-only bank accounts with a host of digital features. So if you’re tech savvy and interested in having the latest features, you may prefer a bank.

So is a bank the better option?

Although banks offer plenty of advantages, there are still some more nuanced perks of being a building society member:

You get a more significant say in the institution’s decision making

As mentioned above, perhaps the most considerable benefit of being a part of a building society is that, unlike banks, they regard you as a valuable member of the overall brand. You’ll consequently have a more direct say in how the institution is run, alongside most of their major financial decisions. 

Having more direct input into the institutions’ decisions can result in better financial incentives on your behalf. For example, you may be able to vote for who you would like to be the next Chief Executive. Or you may be able to vote on whether a building society should adopt a particular stance on an issue.

More of a community feel

I know this doesn’t directly link to any financial motives, but the one aspect many people prefer with building societies is that they have a more local, community and tight-nit feel to them. 

For many, banks can come across as grandiose, corporate and daunting. Although this might be inviting and comforting for some, others may view them as solely profit-driven and overall apathetic towards the everyday person. It’s a subtle yet still important point to consider when comparing the two. 

No investment banking

If you feel uncomfortable banking with a bank that also does investment banking and trading to make money, then you may prefer using a building society. 

Since the Financial Crisis of 2009-10, a raft of new regulations have been implemented to separate a bank’s investment banking and retail banking activities. 

In the UK, any bank that takes part in riskier investment banking activities must ‘ring-fence’ retail customers from it. You may have heard of ring-fenced banking. In practice this means a bank’s retail customers must be serviced through an entirely different legal entity, or company, to its investment banking customers. 

This separates retail customers entirely from anything going on in a bank’s investment arm, and I was often involved in analysing the impact of this in my career.

Importantly, this means that your money is still protected with a bank in the same way it is with a building society. So while your money is still safe, if you have any moral objections to investment banking then you may prefer using a building society. 

To decide? Figure out your priorities

Now that you’ve read through the pros and cons of both banks and building societies, you hopefully have a better idea of the differences and why they matter. 

Remember that building societies are often set up as local institutions and, therefore, more community-oriented. They are driven by their customers or members rather than by profits. So if you’re looking for a financial institution that allows you to have more of a say in what happens to your money and decisions, a building society is likely more suited to you.

In contrast, as privately-owned institutions listed on the stock market, banks are motivated by profit to pay their shareholders. Despite not being as finely tuned to their local communities, they typically offer greater flexibility and variety in financial products. 

One last but important point to mention: neither a bank or building society is inherently safer than the other. The myth that banks are better protected because of their larger financial backing is simply not true. All major UK institutions are set up and regulated to protect their customers’ funds.

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