What Is a Building Society? Key Differences From a Bank
Understand the distinct identity of a building society and its key differences from banks, focusing on its member-centric approach.
A building society represents a type of financial institution that operates with distinct characteristics compared to traditional banks. Its primary function involves accepting deposits from savers and then lending those funds, predominantly in the form of mortgages for residential property purchases. This structure allows it to serve individuals’ financial needs, particularly concerning homeownership and savings, without the direct influence of external shareholders.
Defining a Building Society
A building society is fundamentally a mutual organization, meaning it is owned by its members rather than by external shareholders. Individuals become members typically by opening a savings account or taking out a mortgage with the society.
The core purpose of a building society revolves around providing a secure place for members’ savings and offering financing for home purchases. Unlike shareholder-owned entities, any profits generated are not distributed as dividends to external investors. Instead, these earnings are reinvested into the society, which can lead to better interest rates on savings, lower mortgage rates, or enhanced services for its members. This model prioritizes member welfare over maximizing shareholder returns.
Key Distinctions from Banks
The fundamental difference between a building society and a bank lies in their ownership structure. Building societies are mutual organizations, owned by their customers, who are referred to as members. In contrast, most banks are public companies owned by external shareholders.
This ownership distinction significantly impacts how profits are utilized. For a building society, profits are reinvested back into the business or used to benefit members through competitive rates and improved services. Conversely, a shareholder-owned bank is obligated to distribute profits to its shareholders, often through dividends, and to increase shareholder value. This difference in focus shapes their operational priorities and decision-making processes.
Decision-making within a building society aligns with the collective interests of its members, who often have voting rights on key issues. Banks, however, make decisions with a primary eye toward generating returns for their shareholders. Building societies also frequently emphasize local communities, often maintaining a physical presence and tailoring services to regional needs. Large banks typically operate on a national or global scale with less localized focus.
Products and Services Offered
Building societies primarily offer a range of savings accounts designed to suit different financial goals. These include instant access accounts for flexible withdrawals, fixed-term accounts that offer higher interest rates for committed deposits, and various tax-advantaged savings options. These offerings provide members with secure avenues to grow their money.
Mortgages represent the core lending product for building societies, serving individuals seeking to purchase or refinance residential properties. They provide various mortgage types, including fixed-rate, variable-rate, and first-time buyer options. While their primary focus is on savings and mortgages, some building societies also offer other financial services.
These additional services may include personal loans, insurance products, or basic current accounts for day-to-day banking needs. However, the availability of current accounts or a broad suite of complex financial products might be less extensive than at larger commercial banks.
Membership and Governance
Becoming a member of a building society is typically straightforward, often initiated by opening a savings account or securing a mortgage with the institution. This confers membership status upon the individual. Membership grants individuals a direct stake in the organization.
Members possess certain rights, including the ability to vote on significant decisions affecting the society at its Annual General Meetings (AGMs). This includes the election of the board of directors, ensuring accountability to the membership. The governance structure of a building society is designed to ensure that the board and management operate in the best interests of the members. This member-centric governance ensures that the society’s strategic direction and financial decisions prioritize the welfare and financial needs of its member-owners.