What’s the difference between a bank and a building society?

Do you know the difference between a bank and a building society? It can seem vague but there are some fundamental differences. We’ll talk you through the differences, so you can decide which is better for you.

What is a bank?

Essentially, a bank is an institution that looks after money, and lends money to members of the public. A bank is normally listed on the stock exchange. They’re owned by a number of shareholders. These shareholders have a vested interest in how well the bank does because they take payments out of the profits. These payments are called dividends.

What is a building society?

Building societies also look after and lend money to the public. However, a building society isn’t listed on the stock exchange and doesn’t have shareholders. It’s an organisation owned by its members. Often referred to as a “mutual” society because its members are also its customers who hold savings accounts or mortgages with the building society. Building society numbers are much smaller compared to banks, with just over 44 building societies in the UK today.

The pros of a bank

Banks offer more convenience due to the fact they have more branches located throughout the country. This makes it easier for you to visit your bank in person when you’re away from home.

You’ll also usually be able to find a much larger range of products to choose from with banks.

The pros of a building society

Because building societies don’t have to pay dividends out of their profits to shareholders, they’re able to pass more of the profit on to their customers. This can mean higher interest rates on savings accounts or lower interest rates on mortgages.

Members of a building society have a say in decisions that affect the operation of the society, by way of a single vote that can be cast at the Annual General Meeting. Decisions voted on include the appointing of new directors or the provision of new services.

Because building societies are regional rather than national (apart from Nationwide) you may feel as though the service you receive is more personal.

The cons of a bank

The interest rates offered by banks for products like savings accounts tend to be lower than that of a building society, but they widely vary so it’s always best to shop around. Due to the size of some banks, you might feel as though you don’t receive a personal service.

The cons of a building society

Building societies don’t have many branches. The exception to this is Nationwide who have more than 600 branches throughout the UK. But usually, building societies are only found in the local region they serve. If you like the convenience of being able to walk into a branch on the high street wherever you are, this might be a downside.

Although the product offering is increasing, you may find that products available in building societies are fewer when compared to banks. For example, not all of them offer current accounts like Yorkshire Building Society.

Which one is better for me?

The better one for you is the one that can offer you the best product for your needs. Shop around to get the best deal, sometimes banks will offer lower interest rates on products such as savings accounts than building societies.

Consider the convenience that banks offer with a larger high street presence. Or perhaps it’s more important that you have the opportunity to help shape a building society and like the idea of being a member rather than just another customer.

Whichever you choose banks and building societies both offer protection for the first £85,000 of your savings, under the Financial Services Compensation Scheme.

Read on here to learn about how you can save for retirement - other than your pension.