Adding value - the case for building societies
A Building Societies Association case study

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Page 3: The organisational structure of building societies

Both mutuality and plc status have their advantages and disadvantages, strengths and weaknesses. This is why these different types of organisation can exist side by side in direct competition with each other.

Businesses exist to organise economic activity and add value in the economic system. They control resources and turn these resources into products that customers want. Financial service providers differ from other businesses in that their customers both provide the capital and purchase the financial services of the organisation.

A mutual’s customers are, in a sense, its ‘owners’; in plcs the customers and owners are usually different.  The range of stakeholders in both mutuals and plcs is largely similar: employees, customers and suppliers. However the plc has an additional stakeholder, the shareholder who supplies capital to the organisation.

Mutuals versus plcs

Because of the way in which they are organised, mutuals do not need to pay dividends (a share in the profits of the company) to shareholders. This means that building societies can charge less to borrowers and pay more to savers. The net margin (the difference between the interest rate the customer receives for their savings and the interest rate they pay on their mortgage), therefore, is narrowed.

Margin comparison for converted institutions and building societies (1999)
PLCs %
Abbey National Bank 2.45
Halifax Bank 2.25
Woolwich Bank 2.10
Alliance and Leicester Bank 1.61

Nationwide BS (yr to April 1999) 1.72
Coventry BS 1.14
Britannia BS 1.07
Yorkshire BS 1.03
Source: Individual accounts or press statements

The net margin suggests that building societies need fewer resources to operate and make a profit. As previously mentioned, financial institutions get their resources from their customers, so the extra money needed by banks to pay dividends is taken from them.

This margin advantage is supported by an independent survey from Moneyfacts in December 1999 of the 30 largest mortgage lenders. They show that the cheapest loans, when calculated over a ten year period, were offered by building societies. In the survey, building societies held 15 of the top 20 places.

Customer benefits are also found in savings. Another Moneyfacts study published in December 1999 looked at the performance of TESSAs over the previous five years. This found that eight of the best ten performing accounts to the beginning of 1999 were from building societies.

An argument against the mutuals is that there are no owners to discipline the company and ensure its efficiency. Shareholders will only invest in organisations that make a profit or operate efficiently, so their goodwill is dependent on organisations performing to the best of their ability. However, in practice, plc organisations may lack discipline too, as they may try to create short term results to satisfy shareholders rather than adopt long term strategies.

It is arguable that competition and the low exit costs for members create discipline for the mutuals. If members are dissatisfied, they can withdraw their savings and transfer their loans, thus reducing the resources that the mutual has to operate with.

Building Societies Association | Adding value - the case for building societies