What’s best? Difference between a bank and building society

Many people tend to assume that banks and building societies are the same.

However, this is not the case.

While they are both financial institutions, it is vital to know the difference between them.

This can help you save more money and have more cash in the bank to do the things you love.

What is a bank?

A bank is an institution that looks after your money.

There are traditional banks for individuals and commercial banks for businesses. Not only do they safeguard your funds, but they also lend money to members of the public.

Banks are owned by several shareholders who have a vested interest in the bank’s success, as they take payments (known as dividends) out of the profits.

You can find banks with a high street presence and you can find online or fintech banks, which are managed through an app only.

There are many banks in the UK today, with several hundred across the country.

What is a building society?

Building societies also look after funds and lend money to the public.

However, the critical differences are that they do not have shareholders and are not listed on the stock exchange. 

Instead, a building society is owned by its members. Members are also customers who hold mortgages or savings accounts with the building society, so they are often referred to as “mutual” societies. 

Building societies are not as common as banks; there are only around 47 in the UK today. The Building Societies Association (BSA) is the voice for them as well as credit unions.

Main differences between banks and building societies

There are several key differences between the two.

The first is that banks have external shareholders, yet building societies do not.

Instead, Building Society customers become their members and have a more significant say in what happens to the organisation. 

In terms of the products and services offered, you can expect better interest rates at building societies, yet banks will have a broader range of products available. This is because banks have greater leeway concerning the financial products they can provide. 

When to use a bank

There are many situations whereby opening a current account or enjoying other financial products from a traditional bank make a lot of sense:  

Banks provide a worldwide approach; there are no perceived restrictions or boundaries when using a bank. The trade-off is that you don’t get the ownership benefits or community perks a building society provides.

You can also enjoy a broader variety of products with banks. As private shareholders own banks, they are continually growing, meaning you’re more likely to find enhanced services or products.

Advantages and disadvantages

Banks are more convenient, as there are more branches across the UK. This makes it much easier for you to visit a bank in person if required. You will also enjoy a broader range of products at a bank, as previously mentioned.

On the flip side, the interest rates banks offer on a savings account tend to be lower than the rates provided by building societies. Some people also feel that banks lack a personal service due to the size of these businesses.

If you are looking for a higher rate on interest (who isn’t in these times?!), Chip offers one of the market’s best interest rates in an easy access account. Read more in our Chip review.

You’ll also find you have more choices for the best online banks. If you are looking for a bank account without ID you have more options.

When to use a building society

Let’s take a look at the scenarios where it might make more sense to have one of these accounts:

If you’re looking to save money, you can enjoy better interest rates by choosing a building society. When many people struggle to save at all, an income boost like this is welcome. 

Many people also prefer these organisations because they are more in tune with ISAs, mortgages, and loans.

Advantages and disadvantages

As building societies do not need to pay dividends from the profits to shareholders, customers can enjoy some of the profits being passed onto them. This means lower interest rates on mortgages and higher rates on a savings account. 

Members also have an input in decisions that impact the operation of the building society by way of voting during the Annual General Meeting (AGM). From providing new services to appointing new directors, members have a say in all crucial areas. 

We’ve noticed that you cannot get all the same services. After a conversation in the Skint Dad Community Group, members found out that you cannot cash a cheque in a different currency in a building society. So, if you know you’ll get a cheque from abroad, a bank may be better.

You also need to ensure you have a building society roll number added in the reference field if you are having money sent to you online (for some accounts).

Many people also feel they enjoy more of a personal service when using a building society because these organisations are more regional than national. 

However, this can also be a disadvantage, as the lack of branches can mean you may not have a building society in your local area. You can also expect a more restricted range of financial products, so do keep that in mind when deciding what works best for you.

Read next: Places to keep your money that’s not a bank

Final thoughts

There are pros and cons associated with both banks and building societies. Rather than one being better than the other, it is about understanding your current situation and determining which option will be best for you.

If you want to enjoy better rates on your accounts, a building society is a great choice. However, if you want a broader range of products, a bank may be the better fit.

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