Banking in depth
Bank vs building society
July 2007
Banks and building societies have been battling it out for years, whether the case in question is the best rates, consumer loyalty or reputation
For customers, choosing whether to become financially involved with either a bank or a building society is quite a large step. Majority of people will go directly to their current provider if they are looking for a new financial product, regardless of whether they actually offer the best deal or not, meaning that once the initial relationship is forged then it’s hard to break.
Laying it bare
Over the years, banks have earned themselves a bit of an unscrupulous reputation. This is largely due to their reliance on paying dividends to shareholders, making it necessary for them to meet the required profit margins year on year, however it can also be attributed to the fact that their extensive global customer database means that they cannot make exceptions for everyone.
Compare savings accounts from Alliance and Leicester
Whatever the real reason for this negative press, banks do generally offer a wider range of products than most building societies including current accounts, as well as specialist business services. They also operate internationally which is a key issue for Brits considering working or retiring overseas, something more and more of us are definitely doing these days.
On the flipside are building societies. As mutual organisations, building societies are collectively owned by their members, meaning that they work for their customers and them alone. This inbuilt level of trust is vital for strengthening customer relationships and also allows members to have a say in how the society is run each year at the AGM.
A changeable market
Interest rates are currently experiencing high volatility resulting from equally changeable rates of inflation. This means that when it comes to borrowing money, the rates charged by lenders are so variable far greater emphasis is placed upon getting the best deal rather than who is offering it. This is not however to say that the providers all gain equal footing, simply that reputation and issues of trust are less of a concern when interest rates are so fluid.
“The argument about who is better has been going on since Abbey National converted to a plc in July 1989,” reflected David Holmes, corporate affairs manager at Yorkshire Building Society. “It is generally accepted that building societies offer members better value across all types of savings and borrowing, primarily because they do not have to pay dividends to shareholders.”
This certainly rings true when looking at a selection of fixed rate mortgage deals offered by four of the big name lenders, assuming you are remortgaging away from someone else.
Homeowners looking for a 2-year fixed rate mortgage can borrow at a rate of 5.68 per cent when paying a £499 arrangement fee at Nationwide Building Society, otherwise they are looking at a rate of 6.08 per cent for the fee-free deal. At Britannia Building Society, interest on a 2-year fixed rate deal is charged at a similar 5.69 per cent with upfront fees of £499, or 6.14 per cent fee-free.
This compares against the 6.29 per cent rate of interest offered by HSBC on a 2-year fixed rate paying an arrangement fee of £499 or 6.79 per cent for a fee-free deal, whilst Halifax offer borrowers a rate of 6.59 per cent for a 2-year fixed rate deal with a standard arrangement fee of £499, or 6.79 fee free.
Holmes puts this rate advantage down to the simple fact that building societies give something back: “Building societies are profit ‘optimisers’ whereas banks are profit ‘maximisers’. Societies make enough profit to run the business and maintain their reserves with any surplus being returned to their members via lower mortgage rates and improved savings rates.
“What building societies are really good at is showing their members that they care and have their best interests at heart. Whilst it might be argued that banks offer some tasty savings accounts, they are almost invariably conditional on buying another product which may not be such good value for money.”
As succinctly put by Adrian Coles, director-general of the BSA: “Societies don't just want your business; they also want your views.”
Have a little faith
Trust is definitely an important factor when you consider that 26.4 million adults would sooner go to their bank or building society for advice, even though there is bound to be an unavoidable bias towards their own products.
Around 54 per cent of people believe banks and building societies are among the best sources for financial advice, ahead of family members at 46 per cent and partners or spouses at 40 per cent. By contrast, IFAs – the ones who will give you truly unbiased advice – are consulted by just 21 per cent of Brits.
However some of the most recent research has shown that two-thirds of ‘Big 5’ customers do not trust their banks to sell them the right products, whilst another one in eight claim that they have been the victims of mis-selling.
Would you buy your home insurance from Barclays?
Brian Capon, spokesperson for the British Bankers’ Association believes that one thing the banks do definitely have on their side is size and therefore product diversity: “Because the majority of building societies are relatively small with only a few branches, some of the channels of delivery or products offered may be limited. Some building societies are very localised and offer certain products or services only to people living in their own locality. With banks, the products and services are available wherever you live in the UK and, in many cases in other countries too.”
On paper building societies may have triumphed in the trust department but in practice neither banks or building societies come up smelling of roses. Back in February, the FSA fined Nationwide almost £1 million for security lapses following the theft of a laptop containing sensitive information from an employees’ home, followed by the March airing of the BBC’s Whistleblower programme which shone a light on some unsavoury goings on behind the scenes at Barclays.
Proactive or reactive?
Whether a catalyst for our lack of trust or just fuelling the fire, two-thirds of Brits now reveal that they have lost all faith in their bank. “The research suggests that consumer confidence in the ‘Big 5’ banks has plumbed to levels that are clearly unacceptable,” commented David Kuo, head of personal finance at Fool.co.uk. “Barclays has been singled out by Fool.co.uk readers as one of the least trusted, but the other four banks have nothing to be proud of.
“It is especially disturbing because financial products are now more complex. Consequently, customers must be able to trust banks and building societies to point them in the right direction, and not have to worry about being led up the garden path.
“There was a time when banks lent an umbrella when the sun was shining, and wanted it back when it started to rain. It seems from our research that banks today want you to keep the umbrella because it might not work anyway.”
Banks and building societies may well have to agree to disagree on a number of issues, but they do believe that one thing rises above them all. As concisely put by Angela Knight, chief executive designate of the BBA, “Whether they’re saving or borrowing, customers deserve a fair, transparent and responsible service.” Time will certainly tell if this statement is indeed something financial institutions continue to uphold.
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