Banks are usually seen as the corporate beast of the financial world and building societies are seen as more personal and less sales driven. This view is mainly because we can’t turn on the TV, listen to the radio or read the news these days without hearing about a new banking scandal.
Although a sandal surrounds those we entrust with our hard earned cash many still invest money in and borrow from banks. The truth is banks have good deals for customers and offer competitive rates on savings and mortgages. Building societies also offer good deals and rates too.
What is a bank?
In basic terms, a bank is a financial organisation where people deposit their money to keep it safe. Banks generate revenue in a variety of different ways including interest, transaction fees and financial advice. The main method is through charging interest on the capital it lends out to customers.
Banks are normally companies listed on the stock market and are therefore owned by and run for their shareholders. A bank’s strategy is to maximize profit to increase the share value and give shareholders the best dividends.
They aim to achieve this by giving lower interest rates for savers and taking higher rates from borrowers. Because customers would prefer high saving rates and low borrowing rates, this can create a conflict of interest between the bank’s shareholders and its customers.
What is a building society?
Building societies differs from a bank because they are mutual organizations. Instead of having shareholders, it has members who collectively own the business and who are also its customers. Nationwide, Britannia and Cambridge Building Society are some examples of building societies.
What are the benefits of using a building society?
Many customers see great benefits in building societies because they invest its profit back into the society’s business.
Unlike banks, building societies do not pay dividends, which enables the building society to offer competitive rates of interest on both savings and mortgages. It sets the rates it pays savers at just less than the rate charged to borrowers. This margin gives the society a profit.
Members collectively own the business and are entitled to information on the business and to vote on important issues such as whether to merge with another society or who is on the board of directors.
Some people also prefer building societies over banks because they find them more personal, approachable and more trustworthy than banks. A survey carried out in 2007 found higher levels of saver and borrower satisfaction with customer service in building societies.
In theory, building societies are designed to put customers first as any profit is passed directly on to the customer through better rates of interest on savings and lower borrowing rates.
Choosing where to save or invest your money is a big decision and whether you chose to do it with a bank or building society, looking around is the best way to find the provider that suits you.
Building societies won’t be for everyone, but it’s worth looking into. The thing to do is keep in mind what you want to do with your money (whether you are looking to setup an online savings account or simply to open a business savers account) and then choose what’s right for you.
Since the past 160 years, Cambridge Building Society has been instrumental in providing funding for people buying their own homes and a trusted home for people wishing to save.