What is the difference between a building society and a bank?
Not many of us can actually say we know the difference between a bank and a building society. A lot of us may not even really know what a building society is and what it’s function is. So how do banks and building societies compare? In this guide, we will be examining the differences as well as which is safer for your hard-earned money. Is it safer to put your cash into a traditional bank or into a building society?
Traditionally, banks and building societies have always stood opposite each other in terms of core principles and how they are individually run. But what are the real differences between the two?
What is a building society?
A building society is a financial organisation which pays interest on investments made by its Members. They also lend capital for the purchase or improvement of housing.
What is a bank?
A bank is an institution of finance which is fully licensed to receive deposits as well as give out loans (but not payday loans) Commercial banks are concerned with managing withdrawals and receiving deposits in addition to supplying short-term loans to individual customers and businesses.
Banks are companies which are usually listed on the stock market. Hence, they are owned by and run for the benefit of its own shareholders.
Building societies on the flip side do not have external shareholders involved in their business. How it works is that current account and savings account holder, along with mortgage borrowers are “members” of the society. These members can vote on decisions that will affect the overall building society. Since building societies are not required to pay dividends to any shareholders due to the lack of them, it means that they can consequently offer better interest rates on savings and mortgages to their members.
Come the dawn of the 1980’s, the government decided that banks would now be able to offer mortgages. This was a shift in the industry of banking as they had not done so before. Up to this point, only building societies were offering mortgagees and it had been the preserve of them.
Alongside this, in the 80s, building societies were now given the option to offer traditional banking products such as the current account and even had the option to demutualise into banks if the members agreed on this via a vote.
Thus, before the 80s there was more of a defined difference between a bank and a building society, but the governmental changes since then have blurred the lines slightly.
How Building Societies are Run
There appears to be a lot of confusion as to what differs between banks and building societies when it comes to how they are run. The perception is that building societies are 100% reliant on customer saving deposits, but this is not true.
There are strict limits on the amount of funding that a building society can raise from the wholesale money markets. Traditionally funds are available to lenders at the cheapest rate possible. Building societies are not allowed to raise more than 50% of their funding from the wholesale markets, meaning that they are far less interested in funding themselves through these means than banks are.