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Difference between banks and building societies

Written by Suffolk Building Society

9 May 2023

7 min read

Whilst banks and building societies are both financial institutions, they do not operate in quite the same way. If you are looking for a suitable place to open a savings account, apply for a mortgage or take out other financial products, it’s important to understand the difference. Then you can decide whether a bank and a building society is best for you.

What is a bank?

A bank is a financial organisation, usually owned by shareholders, where people and businesses can save and borrow money. Most banks tend to operate across the whole of the UK, or globally, and customers can use their services no matter where they are located.

What is a building society?

A building society is also a financial organisation offering some of the same products and services as banks, but most often with a focus on savings accounts and mortgages. Building societies are referred to as ‘mutuals’, as they are owned by their members rather than external shareholders. They are run for the mutual benefit of these members and their communities.

The history of banks and building societies

Banks were originally founded as a secure place for wealthy people to store their money. Over time, the basic principles of accepting deposits, paying interest and making loans from the deposited funds were developed. These processes have continued to evolve over time, with most banks now offering a wide range of financial services, from savings and loans to wealth management and investment services.

Building societies were mainly founded in the eighteenth and nineteenth centuries, in response to the increased demand for land and homes. Not everybody could afford to purchase land, so societies were formed to take deposits from members of the community which would then be pooled together into a bigger sum. One by one, members would then be able to purchase land to build a house. The first societies were self-terminating, meaning that once every member had a home, the society would dissolve. As the demand for safer long-term savings increased, permanent building societies as we know them today were formed.

How many banks and building societies are there in the UK?

In total, as of March 2023, there are currently 357 Monetary Financial Institutions (MFIs) in the UK. There are 314 banks and 43 building societies, meaning that societies make up 13.7% of all MFIs. Although there may be fewer societies in comparison to banks, they make up around a quarter of the total mortgage market share.

The difference in ownership

The majority of banks in the UK are listed on stock exchanges and owned by shareholders. These shareholders monitor the overall performance of the bank, and have the right to vote on issues that affect the bank, some of which have the potential to impact customers. Banks will reinvest some of their profits to ensure sustainability and growth, and a large portion of their profits will be paid out in dividends to their shareholders.

As building societies are owned by members, they operate in a different way from banks. Societies tend to work much more locally, so input from and engagement with members is of high importance. Members have the opportunity to attend each Annual General Meeting, where they can ask questions, hear about the society’s upcoming plans and vote on decisions regarding the future running of the organisation. For example, in 2020 over 3,000 members voted to change our name from Ipswich Building Society to Suffolk Building Society. Several hundred Suffolk Building Society members attend the AGM each year.

Building societies are not owned by shareholders, so there are no dividends to pay. Building societies often allocate some of their profits to benefit the local community in which they serve. For example, we currently have two campaigns underway, one to protect the local environment and nature, and the other to help tackle housing issues and domestic violence within the local area.

Does branch accessibility differ between banks and building societies?

Many banks and building societies have branches for customers and members to visit in person. Some banks are online only, so it’s important to decide whether or not you may want to speak to a real person, in person, before choosing where to save or borrow. Since societies tend to be more localised, the branches most commonly aren’t spread nationally. Banks, on the other hand, often have branches across the entire UK.

The number of bank branches in the UK has been on a steady decline since 1994, and in the aftermath of Covid-19, many banks have announced further closures, encouraging customers to use online banking services. Building societies are also digitalising but they understand the importance of personal, face to face interaction too, so the number of building society branches in the country has remained largely the same despite the decline of bank branches.

Do banks and building societies offer the same products?

Generally, banks offer products such as a variety of current accounts and saving accounts, savings bonds, ISAs, credit cards, loans, mortgages and insurance as well as wealth management and financial advisory services.

Building societies most commonly offer savings accounts and mortgage products, however, some societies may offer a wider range. Societies tend to serve their local communities, so some products, particularly savings accounts, may be restricted to customers within postcode areas local to the building society. Most will still accept applications for a mortgage, even if the individual is not local to them.

Are banks safer than building societies?

Although there are clear differences between banks and building societies in some areas, you can expect the same in terms of compensation from the two. Both are authorised by the Prudential Regulatory Authority (PRA) and regulated by the PRA and Financial Conduct Authority. Both banks and building societies are protected by the Financial Services Compensation Scheme.

Whether you choose to save or borrow from a bank or a building society will highly depend on your personal circumstances and needs. If you’re looking for a financial institution in which you can be involved with the decision-making and supporting the local community, a building society might be the best place for you.

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