What can a building society offer you that a bank can’t? And vice versa? Do you know? Where you hold and build your money is important, so we’ve put together this concise guide to help you understand the difference between a bank and a building society.
Should you open a building society account or a bank account? Mistakenly, many people think there isn’t much difference between the two.
On the surface, it may seem this way. But dig a little deeper, and you’ll discover some quite stark contrasts between these two types of financial institution.
Understanding the differences between banks and building societies will enable you to make financial decisions that will help you save more and control your cashflow more effectively.
In this article, we’ll answer key questions including:
- When should you use a building society and when should you use a bank?
- Which is safer for your money?
- What are the advantages and disadvantages of banks v building societies?
In terms of safety for your money, banks and building societies are no different. However, there are some key differences that you should consider when deciding which is best for your needs.
For day-to-day banking, access to the most up-to-date financial products, and for global reach, a bank is best.
But for higher savings rates, lower borrowing costs, and a more personal service, you should usually use a building society.
What Is a Bank?
A bank is a financial institution licensed to receive deposits, provide loans, and hold your money. You can have your salary paid into a bank, set up standing orders or direct debits, and arrange overdrafts, mortgages, and personal loans through a bank.
Traditional banks conduct their business through a network of branches, though most now also offer online banking facilities, too.
The new style of banks ─ often called fintech or challenger banks – have no branches. You can open accounts online and manage your finances through a website or, more commonly today, an app on your smartphone.
When we think of banks, we tend to think about the so-called big four: Barclays, HSBC, Lloyds, and NatWest.
However, there are dozens of banks in the UK, including names such as Bank of China, Cater Allen Ltd, and Virgin Money. Even the big retailers like Tesco and Sainsbury’s offer banking services.
Banks are usually owned by shareholders, and their shares are often traded on stock exchanges.
What Is a Building Society?
Building societies offer many of the same services and products as banks. However, how they operate is very different to banks.
A building society is owned by its account holders – called members – who can have a direct say in how the building society is managed.
Most of a building society’s profits are used for the good of its members. This includes providing cheaper loans and paying higher interest rates, and not paying dividends to shareholders.
There are far fewer building societies than banks, though this hasn’t always been the case. Today, there are fewer than 50 UK building societies – a stark contrast to the early 1900s when there were thousands.
This huge decline in the number of building societies has been caused by mergers, acquisitions, and many building societies becoming banks over the years. Today, the largest building societies in the UK are:
- Yorkshire Building Society (who also own other building societies such as Chelsea, and Norwich and Peterborough Building Society)
- Skipton Building Society
- Coventry Building Society
- Leeds Building Society
Key Differences Between Banks and Building Societies
As we’ve mentioned above, banks are owned by and managed for the benefit of their shareholders. Building societies are owned by their members – savings and loan account holders.
Because building societies don’t have to pay dividends to shareholders, they are not focused on profits. Instead, they concentrate their effort on providing exceptional value to their members by way of more competitive interest rates.
They are also more restricted in how much funding a building society can raise from the money markets, meaning they are less likely to use such funds to fund themselves than banks are.
The products that banks and building societies offer to customers are very similar today. This is because the financial rules governing UK financial institutions were changed in the early 1980s. Prior to this time, banks could not offer mortgages and building societies could not offer current accounts.
Consequently, there is a much smaller difference between banks and building societies – hence the general confusion about which is which. However, the difference is still wide enough to make each better for specific financial uses.
Which Is Safer – a Bank or a Building Society?
Banks and building societies are both regulated by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
Because of this, whether you have money in a bank or building society, it is protected by the Financial Services Compensation Scheme (FSCS) – meaning that if the bank or building society goes bust, up to £85,000 will be guaranteed to be returned to you.
The Advantages and Disadvantages of Using a Bank
Most people in the UK have a bank account. In fact, according to data from theglobaleconomy.com, more than 99% of UK residents over the age of 14 have at least one bank account, and four out of five of these were using online banking.
Having a bank account is convenient. It makes it easier to receive your salary, and, if you do need in-person advice, there are way more bank branches than building society branches.
However, it’s not only the convenience of online banking and high street branches that makes banks attractive.
You’ll also have access to a broader range of financial products and services, such as debit cards that you can use while travelling abroad and foreign money transfers.
However, convenience and product choice come at a cost. The interest rate charged to borrow from a bank is usually higher than from building societies, and interest you receive on your savings is usually lower.
Plus, while there may be more branches to service your needs, the personal touch is often lacking.
The Advantages and Disadvantages of Using a Building Society
Building societies are noted for their more personal service. After all, as an account holder you are also an owner – and this brings greater respect. This culture is in their DNA.
Because a building society has no need to pay dividends to shareholders, and no compulsion to have a high share price, they can direct more of their profits into paying higher savings rates and keeping lending rates lower.
Building societies are also willing to lend to higher-risk customers that might be turned away by a bank (for example, think first-time homebuyers with a low deposit).
However, many building societies don’t offer current accounts. This makes them of less use for day-to-day banking needs. With fewer financial products offered, it’s not always possible to service your needs as a building society customer.
When Should You Use a Bank?
There are many circumstances in which using a bank should be your first port of call. These include:
- To have a current account for your salary to be deposited and your bills to be paid
- For the convenience of in-person and online banking
- When you wish to travel abroad and have the option to pay with your debit card (though your debit card may not be the best way to spend money abroad)
You’ll also find that banks are more innovative and introduce new financial products and services faster than building societies.
When Should You Use a Building Society?
If you can’t have access to a current account with a building society, when would it make sense to become their customer?
Simply put, when you are saving or borrowing money. It’s no coincidence that many of the best regular savings accounts are offered by building societies.
Also, if you want a highly personalised service in which you feel valued, then a building society is more likely to give this to you.
The Bottom Line
Banks and building societies are regulated equally, and offer the same level of protection to your money. However, they are different animals in the same financial zoo.
Understanding how they differ will help you make better decisions for your money. It’s not about whether a bank or building society is better overall, it’s about which is better for your unique needs.
For day-to-day banking, access to the most up-to-date financial products, and a global reach, a bank is best. But for higher savings rates, lower borrowing costs, and a more personal service, you should be using a building society.