Even if one wanted to bank with a building society, it is becoming increasingly hard to find one on the High Street, and even online. Most of the familiar names have already converted: Bradford and Bingley, Halifax, Alliance and Leicester, and the Woolwich. The almost inevitable acquisition by larger banks has followed. These acquiring banks are now largely digital, with new entrants such as Atom Bank seizing market share by providing exclusively online offerings with competitive rates and easy-to-use mobile interfaces that seem well beyond the capacity of traditional building societies, and peer-to-peer lending also rising in market share. Those that remain, with the exception of the Nationwide, do not offer current accounts, except in a local area. Pursuing a preference for a building society account is now a distinctly minority activity.
The main advantage building societies ought to have had, they have thrown away, even if customers still trust them far more than their bigger competitors. Building societies were always supposed to be staid, secure places where your money was safe, as a result of safe, low-risk lending and equally conservative funding policies. The collapse of Dunfermline and of Northern Rock, and the bail-out of the West Bromwich proved this a fable. The government stepped in to stop the 2007 run on Northern Rock with a 100% deposit guarantee, but there is now clear inequity between guarantees to banks and to building societies. Here personal banking courses provide invaluable background information on the cause of the crisis and how it has had severe adverse effects on borrowers. The Northern Rock ironically named ‘Together Mortgage’ allowed customers to borrow well over 100% of value, and they found themselves trapped in negative equity, unable to switch lender and forced to pay over double the market interest rate. Understandably, these customers feel deeply unsatisfied with building societies, although financial advisers reply sternly that these customers should not have borrowed as much as they did, pointing to the more stringent due diligence and harsher lending criteria of banks as an actual advantage – an application of paternalistic financial policy. LTV problems aside, there is also the fact that with funding now significantly dependent on deposits, and capital requirements greater than ever before, the ability of building societies to attract and retain the right calibre of depositors is under scrutiny.
Even the higher rates of interest on savings accounts and lower rates on mortgages that are sometimes still claimed for building societies are rarely still available, as marketing and management costs are lower – up to a third less- not to mention the absence of dividends. Some are – one price comparison survey suggested that 5 of the 6 fixed rate (for two years) mortgage best buys being offered by building societies. Just as important, the offers are available to all customers, not just new ones and not just those borrowing large amounts. With underwriting slightly less rigorous still, the building societies have a little more flexibility and can still offer some personal deals. Thus if you are a small-scale borrower on a budget, local, in a particular profession such as a teacher, keen on participating in the future of your lender, or a highly idiosyncratic borrower, even one who may experience very irregular cashflows, this may make a difference – not that any rates are currently very high, but they may yet rise. For the majority of borrowers, however, the difference will be negligible or even non-existent. That leaves service to the declining band of exclusively High Street customers, which is also probably still better from building societies.
Financial advisers and advice from banking courses remain adamant, however – overwhelmingly in a digital banking world it is the specific product that you choose and the ease of switching which matters, more than the particular institution. Here in the longer-term banks are likely to enjoy comparative advantage, as the market in ISAs demonstrates, with the likelihood of offerings such as immediate international real estate purchase, unified share trading/mortgage/current account banking, and integrated risk management products – all concepts ironically pioneered by building societies such as Abbey National two decades ago – being available to retail clients within a decade now very real. There must be a very real risk that as technology spurs disintermediation and slices costs, and the generations shift, certainly smaller building societies will find their client base shrinking and their viability under threat.
Author Julian Roach of Redcliffe Training