Building societies are feeling the squeeze – but don’t discount these underdogs just yet

Barely a month goes by without a new banking firm popping up. And while some are interesting, and a few perhaps revolutionary, most have simply rolled out mortgage and savings products in an attempt to muscle in on the home turf of the UK’s building societies. Add to the mix a fast deteriorating High Street environment, and there’s little doubt that building societies are starting to feel the squeeze.

But far from being cowed, the mutual sector is gearing up to take on the new kids on the block, in a battle that cuts to the heart of what our society in 2018 really stands for.

Since the birth of building societies, their bread and butter has been the margin between deposits and mortgage lending, which is ‘a challenge in this low interest rate environment’ according to David Lownds, Head of Marketing & Business Development at Hanley Economic Building Society. New banks, with leaner operating models, have also squeezed this margin.

Aside from tighter margins, the mutual sector has other pressing challenges. ‘Without doubt the biggest challenge we face is the increasing cost associated with meeting ever more stringent regulatory requirements which can be disproportionate for a lender of our size. Because we lend carefully we came through the banking crisis unscathed, however the consequences of some reckless lending by others are impacting on us as the regulator raises the bar to prevent a recurrence,’ says Ian Keeling, Director of Sales and Marketing at the Vernon Building Society based in Stockport. David Lownds of The Hanley adds, ‘attracting new younger customers whilst ensuring our existing customer base remains well served is a key challenge.’

So how do building societies plan to stand out and stay relevant in an increasingly competitive environment?

‘We provide something that many banks are failing to – a personal and individual service. Banks continue to reduce costs through automation and centralised call centres. In many cases dealing with these can be a frustrating experience for ordinary people. For example our lending decisions are not made by computers, instead we take a sensible common sense view of a person’s whole situation, recognising that this can sometimes be complicated and not perfect’ says Ian Keeling of The Vernon. The building society sector as a whole now accounts for about 30% of all new mortgages approved in the UK, with specialist areas like self build and old age mortgages becoming increasingly important to the sector.

Partnerships are also set to play a bigger role going forward. The Yorkshire Building Society launched one with SalaryFinance to help consumers build-up rainy day funds by deducting an agreed amount straight from their salary, and the Saffron Building Society has teamed up with Zopa to offer its members access to low cost personal loans. Other societies have taken bold distribution moves, for example, the Dudley Building Society now does all its mortgage business via brokers.

And with the challenges of a margin business only intensifying, diversification is another theme that’s increasingly occupying the minds of a number of societies. The Newcastle Building Society has long had success offering outsourcing services to a range of banks and building societies, while The Skipton owns Connells Group, a leading estate agency with close to six hundred branches.

Building societies also hope that playing an important role in the communities they serve will help them stand out in the minds of consumers. For example, the Darlington Building Society recently formed a wide-ranging partnership with Theatre Hullabaloo, the only dedicated children’s theatre outside of London.

But for all this activity, the narrative of the last few years has largely swept the role of building societies aside.

The hope has been that new financial firms would help to drive up standards, and force incumbents to work harder. But challenger banks have a mixed record of delivering good customer outcomes, with the ongoing TSB IT debacle providing a timely reminder. Furthermore, most new financial firms are focused on ‘overbanked’ customers. These customers already have access to a full suite of products and services, but are attractive and profitable segments to focus on, so more firms pop up to cater for them.  

While it’s clear that fewer consumers are relying on branches, certain segments and communities still do, and building societies can often find themselves offering the last branch in town. In this way, building societies are increasingly providing a lifeline to consumers that few others seem want, and have become vital to ensuring that standards don’t fall for an all too often forgotten minority. Data from Smart Money People shows that 10% of consumers prefer branch banking over other channels in 2018.

The greatest societal challenge we face in 2018 is not leaving hoards of consumers behind. Will sleek logos fronted by American pop stars win our hearts and minds, and the future of UK financial services? Or will we place more value in organisations (mutual or otherwise) that help to underwrite the kind of consumers and communities that are all too easily forgotten?

Mike Fotis is the Founder of Smart Money People and a former financial services consultant.