Differences between banks and building societies

A bank and a building society differ mainly in their structure, ownership, purpose, and services. Here is an explanation of their differences, with real-world examples for better understanding:

1. Ownership Structure

• Banks: Banks are typically shareholder-owned companies. This means that they are listed on the stock exchange, and their primary goal is to make profits for their shareholders. Examples of major banks include Barclays, HSBC, and Lloyds Bank.
  • Example: When HSBC makes a profit, dividends can be distributed to its shareholders. Decision-making is often driven by the goal to maximize shareholder value.
• Building Societies: Building societies are mutual organizations owned by their members (customers who have accounts or mortgages with them). They typically aim to benefit their members rather than maximize profits.
  • Example: The Nationwide Building Society is the largest in the UK. When it makes a profit, it reinvests this into better interest rates for its savers and borrowers or improved customer service instead of distributing it as dividends to shareholders.

2. Purpose

• Banks: Historically, banks provide a wide range of financial services beyond basic banking, such as international banking, investment banking, and wealth management. They serve a broader customer base, including individuals, small businesses, and large corporations.
  • Example: Barclays Bank offers retail banking services, but also investment banking and corporate financing solutions worldwide.
• Building Societies: Building societies primarily focus on offering savings accounts and mortgage lending to individuals. Their purpose is to support homeownership and savings among members, though many have expanded their services to include other basic banking products.
  • Example: Yorkshire Building Society offers savings accounts, personal loans, and mortgages, but it doesn't deal with complex investment banking activities.

3. Services Offered

• Banks: They provide a broad array of products, including loans, credit cards, mortgages, savings accounts, business banking, and often more complex financial instruments. Their larger size and resources often allow them to offer sophisticated financial services.
  • Example: HSBC offers not only standard banking services but also foreign currency accounts, international loans, and investment opportunities.
• Building Societies: They tend to focus on a simpler range of services, emphasizing traditional savings and mortgage products. However, some larger building societies do offer current accounts, credit cards, and personal loans, though these are usually on a smaller scale than banks.
  • Example: Coventry Building Society mainly offers savings products and mortgages, staying closer to its traditional roots of serving savers and home buyers.

4. Profit Distribution

• Banks: Profits are generally distributed to shareholders through dividends or reinvested to grow the bank.
  • Example: If Lloyds Bank has a profitable year, its shareholders benefit directly through dividend payments or share price appreciation.
• Building Societies: Profits are reinvested for the benefit of their members, usually through higher interest rates on savings, lower rates on loans, or service improvements.
  • Example: Nationwide Building Society has been known to offer competitive mortgage rates because it reinvests profits into member-focused initiatives.

5. Regulation and Lending Criteria

• Banks: Banks are often more heavily regulated in some areas due to their size, complexity, and potential systemic risk. They may also have more flexibility in lending criteria and offer products with a wide range of risk profiles.
  • Example: Barclays might offer complex loans for large infrastructure projects or risky investments that a building society wouldn't typically provide.
• Building Societies: They must abide by stricter limits on how much they can raise from non-member sources (at least 75% of their funding must come from members). Their lending focus is more conservative, often emphasizing residential mortgages.
  • Example: Leeds Building Society concentrates primarily on residential lending and is less likely to engage in high-risk lending activities.

In summary, banks are shareholder-driven, profit-maximizing institutions that offer a diverse range of financial products, while building societies are member-owned, member-focused organizations that prioritize their members’ interests, particularly in savings and mortgage products.