Differences Between Building Societies & Banks

All of us know about the existence of building societies and banks. But have many of us ever stopped to consider what the difference between the two are, when they both have so many similarities? Moolr stopped to give it some thought and looked at the differences between building societies and banks.

Common Ignorance

Not many of us truly know the difference between a bank and a building society. A lot of us may not even really know what a building society is and what its function is. So how do banks and building societies compare? Moolr examine the differences as well as which is safer for your hard-earned cash. Should you put your money into a normal bank or into a building society?

Historically, banks and building societies have always stood opposite each other in terms of core principles and how they are individually run. But what are the real differences between the two?

What is a building society?

A building society is a financial organisation which pays interest on investments made by its members. They also lend capital for the purchase or improvement of housing. They are similar to credit unions in organisation, though few enforce a common bond. However, rather than promoting thrift and offering unsecured and business loans, a building society’s purpose is to provide home mortgages to members.

What is a bank?

A bank is a financial institution which is fully licensed to receive deposits as well as give out loans. Commercial banks concern themselves with managing withdrawals and receiving deposits in addition to supplying short-term loans to individual customers and businesses. Essentially, a bank is a financial institution that into which the public deposit funds and they create credit.

Banks are companies which the stock market lists. Hence, shareholders own and run them for their own benefit.

Shareholders

Building societies do not have external shareholders involved in their business. Those who utilise its functions are “members” of the society. These members can vote on decisions that will affect the overall building society. Since building societies are not required to pay dividends to any shareholders due to the lack of them, it means that they can consequently offer better interest rates on savings and mortgages to their members.

1980s

During this decade the differences between the two institutions became greyer. Banks could offer mortgages, whilst building societies were given the option to offer traditional banking products such as the current account. Thus the lines are now more blurred.

How Building Societies are Run

There appears to be a lot of confusion as to what differs between banks and building societies when it comes to how they are run. The perception is that building societies are 100% reliant on customer saving deposits, but this is not true.

There are strict limits on the amount of funding that a building society can raise from the wholesale money markets. Traditionally funds are available to lenders at the cheapest rate possible. Building societies are not allowed to raise more than 50% of their funding from the wholesale markets, meaning that they are far less interested in funding themselves through these means than banks are.