What is a Building Society?

A building society is a type of bank in the United Kingdom. But it is not exactly the same as other banks. Building societies focus mostly on savings accounts for regular people. They also give out mortgages, which are loans to buy homes.

In the past, building societies were set up to help people save money and buy homes. People became members of the building society when they opened an account or got a mortgage there.

How Building Societies Started

The first building societies showed up in the 1700s. Back then, it was hard for regular workers to get loans to buy houses. So groups of workers got together and made building societies.

Each member would pay a little money every month into the building society. When the group had enough money saved up, they would lend it to one of the members to buy a house. Then that member would keep paying into the society until all the members had gotten loans to buy houses.

How Building Societies Changed

Building societies stayed popular for a long time. By the 1900s, there were hundreds of them all over the UK. Most towns had their own local building society.

Laws about Building Societies

In 1874, Parliament made a law just for building societies. It said how they should be run. In 1986, Parliament made that law less strict. This let building societies offer more types of banking services, not just savings and mortgages.

Some building societies decided to become regular banks after 1986. They “demutualized”, which means they stopped being owned by their members and sold shares on the stock market instead. But many others stayed as building societies.

The Business of Building Societies Today

Today, building societies still focus mostly on savings accounts and mortgages. They are known for giving good interest rates on savings and having helpful service. Many of them only do business in one part of the country, or only online.

The biggest building society in the UK now is Nationwide. In 2021, Nationwide had over 16 million members and more than £200 billion in assets. That means it looks after a lot of people’s money.

How Building Societies are Different from Banks

The main difference between building societies and regular banks is who owns them. Most banks are owned by shareholders. But building societies are owned by their members – the people who have accounts and mortgages with them.

Profits and Payments

Since building societies don’t have shareholders to pay, they can often offer better deals to savers and borrowers. They don’t have to make as much profit as banks. Instead, they try to give as much benefit to their members as possible.

Building society members vote to elect a board of directors to run things. The directors don’t get paid as much as bank directors. And if the building society makes a big profit, it gives more interest to the savers and charges less to the borrowers instead of paying it to shareholders.

Products and Services

These days, building societies offer a lot of the same services as banks. Members can have current accounts, credit cards, ISAs, and more. But most building societies still don’t do much business banking for companies. And they usually don’t trade complicated financial products like derivatives.

Instead, building societies stuck to being good at the basic banking needs of regular people. Compared to banks, more of their mortgage loans tend to be for people’s homes instead of rental properties or developments. And more of their savings come from individuals instead of big companies.

The Future of Building Societies

Building societies have been around for hundreds of years. Their focus on helping members instead of making profits for shareholders has kept them popular. But they face challenges.

Competition from Banks

The biggest challenge is competing with big global banks. Since the 1980s, many banks have started offering more mortgages and savings accounts. They want to win business away from building societies.

Some people think banks can give better deals because they are bigger. Building societies argue they are better because they care more about members.

Online Banking

Another challenge is online banking. More people want to do all their banking on apps and websites now. So building societies have to offer great online services to keep up.

Some new building societies are online-only. They don’t have any branch offices. This helps keep their costs low so they can offer top rates. But traditional building societies say branches are still important for good service.

New Laws and Rules

Building societies also have to follow a lot of rules about how they lend and invest money. The government wants to make sure they are run safely. But this can make it harder for small building societies to afford all the legal and technical costs.

Some people think more building societies will need to merge together to stay strong. Others think more will change into banks. But most people think building societies will keep being an important option for British savers and homebuyers.