Difference Between Bank and Building Society – What is Right for You?

Welcome to our blog post, where we dive into the fascinating world of finance and help you understand the difference between a bank and a building society. Whether you’re looking to open an account or simply curious about these financial institutions, this article will provide you with all the answers you need.

Banks and building societies are integral parts of our everyday lives, yet many people are unaware of their distinct characteristics and how they can impact your financial decisions. So let’s break it down, shall we? In this article, we’ll explore the definitions of banks and building societies, outline their key differences, discuss the advantages and disadvantages of each option, address concerns about protecting your money in case of collapse or insolvency, and finally determine if building societies are safer than banks.

What is a Bank?

A bank is more than just a physical building where you deposit your hard-earned cash. It’s an institution that provides a wide range of financial services to individuals and businesses alike. Banks act as intermediaries between those with excess funds and those needing capital.

When you open an account with a bank, you gain access to a plethora of services such as savings accounts, checking accounts, loans, mortgages, credit cards, and investment opportunities. They are like the Swiss Army knife of the financial world!

Banks’ ability to create money through lending activities sets them apart from other institutions. Yes, you heard it right! Banks have the power to create new money when they issue loans or provide credit facilities. This process, called fractional reserve banking, allows them to expand the money supply within an economy.

Furthermore, banks play a crucial role in facilitating transactions by providing payment systems such as debit cards and online banking platforms. They ensure that your hard-earned money can be easily transferred or accessed whenever needed.

In addition to these services, banks also offer valuable financial advice and guidance tailored to your specific needs. Whether you’re saving for retirement or planning for a major purchase like a house or car – they’ve got experts ready to assist you on your journey towards financial success.

What is Building Society?

Building societies are financial institutions that provide a range of banking services similar to traditional banks. However, there are some key differences between the two. Building societies originated in the 18th century as mutual organisations owned by their members, who were also their customers. Unlike banks, building societies do not have shareholders and operate for the benefit of their members.

One major advantage of building societies is that they often offer more personalised customer service compared to larger banks. Since they prioritise their members’ interests over profits, building societies may be more willing to work with individuals on unique financial situations or offer tailored products and services.

Additionally, building societies tend to focus on providing mortgages and other lending options for homeownership. They typically have lower interest rates and fewer fees than commercial banks, making them an attractive option for those looking to buy property or refinance existing loans.

Another important characteristic of building societies is their commitment to local communities. Many building societies invest back into the areas they serve through charitable donations or community initiatives.

A building society operates similarly to a bank but with notable differences in ownership structure and focused offerings such as mortgage lending. Their member-centred approach allows for personalised service and potential benefits when it comes to home financing options.

Difference Between Bank and Building Society

A bank and a building society are both financial institutions that offer a range of similar services, but there are a few key differences between the two.

• Ownership: One of the main differences is their ownership structure. Banks are typically owned by shareholders who invest in the bank’s shares while building societies are owned by their members, who are usually customers with savings or mortgage accounts.
• Purpose: Banks are profit-driven entities aiming to maximise returns for their shareholders. Building societies, on the other hand, are mutual organisations that prioritise the interests of their members by providing them with competitive rates and services.
• Product Focus: While both banks and building societies offer a wide range of financial products and services, such as current accounts, savings accounts, loans, mortgages, and insurance, building societies often have a stronger focus on residential mortgages. They may offer more favourable terms and lower interest rates for mortgage products compared to banks, as they aim to support homeownership for their members.
• Branch Network: Historically, building societies were more prevalent in local communities and had a stronger presence in specific regions. However, with the advancement of digital banking, the distinction has blurred, and now both banks and building societies have online and mobile banking options. Banks generally tend to have a wider branch network and more ATMs compared to building societies.
• Regulation: Both banks and building societies are regulated by financial authorities to ensure their stability and protect customers’ interests. In the United Kingdom, for example, banks are regulated by the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). At the same time, building societies are regulated by the same bodies but also have additional regulation from the Building Societies Association (BSA).

Advantages and Disadvantages of Bank

Advantages of Banks:

1. Range of Services: Banks offer a wide range of financial services, including checking and savings accounts, loans, mortgages, investment products, credit cards, and more. This allows customers to conveniently access and manage their financial needs in one place.
2. Branch Network and ATMs: Banks typically have a widespread branch network and a large number of ATMs, making it easier for customers to access their accounts, make transactions, and seek assistance in person.
3. Technology and Convenience: Banks have been at the forefront of adopting technology to enhance customer experience. Online and mobile banking platforms allow customers to perform transactions, pay bills, transfer funds, and monitor their accounts conveniently from anywhere.
4. Safety and Security: Banks are subject to strict regulatory oversight, which helps ensure deposits’ safety and protects against fraud. Deposit accounts held in banks are often insured by government-backed schemes, providing additional security to account holders.

Disadvantages of Banks:

1. Fees and Charges: Banks may charge various fees for different services, such as monthly account maintenance fees, ATM fees, overdraft fees, and transaction fees. These costs can add up and affect the overall value for customers.
2. Limited Personal Touch: The size and scale of banks can sometimes result in less personalised customer service. Dealing with complex issues or getting specific assistance may require navigating through automated systems or waiting in long phone queues.
3. Stringent Lending Criteria: Banks often have strict lending criteria, making obtaining loans or credit challenging for individuals with limited credit history or unconventional financial situations.
4. Profit-Driven Approach: As profit-driven institutions, banks may prioritise the interests of shareholders over those of individual customers. This can sometimes lead to higher interest rates on loans, lower interest rates on savings, and other practices that may not always align with customer needs.

It’s worth noting that these advantages and disadvantages can vary depending on the specific bank and the individual’s unique circumstances and requirements.

Advantages and Disadvantages of Building Society

Advantages of Building Societies:

1. Customer Ownership: Building societies are mutual organisations owned by their members. This means that the interests of the members are prioritised over profit maximisation, resulting in a focus on providing competitive rates and services that benefit the customers.
2. Favorable Mortgage Terms: Building societies often have a stronger focus on residential mortgages and may offer more favourable terms, such as lower interest rates and flexible repayment options. This can be advantageous for individuals looking to purchase or refinance a home.
3. Local Community Presence: Historically, building societies had a strong presence in local communities, with many being established to support home ownership within specific regions. Some building societies still maintain this local focus, providing personalised service and supporting community initiatives.
4. Member Benefits: Building societies may offer additional benefits to their members, such as loyalty programs, preferential rates, or access to exclusive products. This can enhance the overall value proposition for customers.

Disadvantages of Building Societies:

1. Limited Product Range: Building societies typically have a narrower product range compared to banks. While they usually offer savings accounts, mortgages, and other related products, their offerings may be less diverse than larger banks that provide a broader range of financial services.
2. Smaller Branch Network: Building societies generally have a smaller branch network compared to banks. This may result in limited physical access for customers who prefer face-to-face interactions.
3. Technology and Online Presence: Although building societies have embraced digital banking, their online and mobile banking platforms may not be as advanced or feature-rich as those offered by larger banks. This can impact the convenience and flexibility of managing accounts remotely.
4. Limited Availability: Building societies may primarily operate within specific regions or communities, which can restrict their availability to individuals living outside those areas. This limits the choice and accessibility for potential customers who don’t have access to a local building society.

It’s important to note that not all building societies will necessarily exhibit these disadvantages, as they can vary based on the specific institution and its size, scale, and strategic focus. Some building societies may have overcome these challenges through partnerships or collaborations with other financial institutions.

How Can I Protect My Money From a Bank Collapse?

One of the concerns that many people have when it comes to keeping their money in a bank is the fear of a potential collapse. While bank collapses are rare, it’s always good to be prepared and understand how to protect your hard-earned cash.

One important step in safeguarding your money is to diversify your investments. Instead of keeping all your funds in one bank account, consider spreading them across multiple banks or financial institutions. This way, if one institution were to experience difficulties, you wouldn’t lose everything.

Another option is to keep an eye on the financial stability and reputation of the banks you are considering using. Research their track record and ratings from reputable credit rating agencies. Look for banks with strong capital positions and robust risk management practices.

Additionally, consider deposit insurance schemes offered by regulatory bodies such as the Federal Deposit Insurance Corporation (FDIC) or similar organisations, depending on your country’s regulations. These schemes provide protection up to a certain limit per depositor per institution.

It’s crucial to regularly monitor your accounts and stay informed about any news or changes within the banking industry. By staying vigilant and proactive, you can quickly react if there are any signs of trouble with your chosen bank.

What Happens if Building Society Goes Bust?

When it comes to financial institutions, the possibility of one going bust is a concern that many people have. While building societies are generally seen as more stable than banks, they are not immune to economic downturns or mismanagement. So, what happens if a building society goes bust?

If a building society were to go under, there are measures in place to protect depositors’ money. The Financial Services Compensation Scheme (FSCS) ensures that individuals with accounts in the failed institution will be compensated up to £85,000 per person (£170,000 for joint accounts). This means that even if your building society collapses, you won’t lose all your hard-earned savings.

Once a building society fails and enters insolvency proceedings, an administrator or liquidator will be appointed to handle its affairs. They will work towards maximising the value of the assets and distributing them among creditors and depositors.

It’s important to note that while compensation from the FSCS provides some level of security for depositors, it may take time for funds to be returned. It’s always prudent to keep track of any developments regarding your deposits and follow instructions provided by regulatory authorities.

In such situations, it’s natural for customers of a failed building society to feel concerned about their mortgages or loans with the institution. Typically, these agreements would transfer over intact when another financial institution acquires the defunct company’s assets.

Are Building Societies Safer Than Banks?

When it comes to the safety of your money, it’s natural to have concerns. After all, you’ve worked hard for your savings and want them to be protected. So, are building societies safer than banks? Let’s explore.

Building societies operate differently from banks. Their members own mutual organisations, whereas banks are typically shareholder-owned entities. This difference in ownership structure can affect the way they handle risks and navigate financial challenges.

One advantage of building societies is their focus on serving their members rather than maximising profits for shareholders. This can lead to a more conservative approach to lending and investments, which could contribute to greater stability during economic downturns.

Also, building societies often have a smaller customer base than large commercial banks. This can make them more nimble and less exposed to systemic risks that may arise in the broader financial system.

However, it is important to note that no financial institution is completely immune from risk or failure. Building societies still face potential challenges, such as liquidity issues or mismanagement, that could impact their stability.

To ensure the safety of your money, regardless of whether you choose a bank or a building society, there are steps you can take. Consider diversifying your savings across different institutions or accounts. This spreads the risk and reduces your exposure if one fails.

Conclusion

No matter which one you choose, a bank or building society, it is important to consider your particular needs and preferences when selecting the right financial institution for you. Banks tend to offer more services while also having access to larger funds, whereas building societies are typically smaller institutions that offer competitive savings rates and loans.

Ultimately, it is up to you to decide what is best for your individual financial situation. We hope this article has given you some insight into what makes each type of institution unique so that you can decide where best to keep your money. Good luck!