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When Is A Building Society A Bank?

Not what it seems

Our High Street is full of both Banks and Building Societies. What’s the difference and when does a building society become a bank?

The feeling’s mutual

Banks are normally companies that are listed on the stock market. To be listed they have to be owned or run by shareholders, in other words they have distributed shares, raised finance through that distribution and the shareholders now get a share of the profits and to a lesser extent a say in the running of the company.

That ‘say’ is usually limited to casting a vote at shareholders meetings as they usually relinquish the day to day running of the company to the board of directors who after all have been appointed for their knowledge of business. The board, however, are answerable to those who hold the shares.

On the other hand

Building Societies were all set up as mutual institutions. That means they didn’t have share holders. Instead the profits were divided between those who invested with them. So as a customer you became eligible for a share of the profits and had the opportunity to vote on the running of the company irrespective of how much you had saved with the building society.

Over the years Building Societies which were originally set up to service a specific local area have obviously followed market trends and expanded to service a much wider geographical area.

Partly due to the changes that have occurred in the market with improved communications and technology there is now very little difference between a bank and a building society. In fact, some of the High Street names that you think are building societies are in fact, banks: such as Abbey.

Traditionally, Building Societies reckoned they could offer mortgages and loans at slightly lower rates than banks, but amongst modern competition this is probably no longer true.

A leopard changes its spots.

Real mutual Building Societies do still exist, the Nationwide is one and is operating profitably. Operating profitably is probably the wrong terminology to use as the dictum of the original mutual societies was to operate for the benefit of its members, not for profit – the profits were divided equally among members.

Theory and practice of Mutual Building Societies

Even with mutual societies there is much that used to occur (or should perhaps occur in theory) but in practice, doesn’t quite happen. For instance, the rights of members to influence the company and the fact that profits should be split among its members neither of these quite stand up in 21st century finance.

The profits of a mutual society are today usually ploughed back into the organisation, so the member should benefit from lower interest rates and the like rather than the profits being divided out amongst the members, which would lead to an unworkable business model.

The reality is also that the board of directors usually receive a profit based bonus and a member’s right to influence the running of the society is limited to their annual vote.


The exception to this is when mutual companies want to change to privately owned shareholder-driven organisations. This is when all members receive a cheque, typically for several hundred, if not thousands of pounds, as their share of the business at that time.

And so on

Fundamentally, whether you bank with a Building Society or with a Bank won’t really affect you. The directors of both types of organisations will continue with their daily high level finance and business games while we mere mortals will make do concerning ourselves over whether our account will slip accidentally into the red this month or not and if it does how much will they charge us?

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