By FintechOS · October 24, 2022
6 minute read

Building societies: 5 challenges facing this banking sector

Building societies: 5 challenges facing this banking sector

Building societies are a unique category of financial institution, distinct from traditional banks, but equally in need of digital transformation to confront their own particular challenges. Let’s consider five unique issues facing this vibrant sector.

Ketley’s Building Society, founded in Birmingham, England, in 1775, was the first ever recorded building society. Ketley’s society met in a pub where each person would pay a monthly subscription that was used to fund the construction of houses for its members. These houses were then used as collateral to acquire further finance for the society. This idea caught on and there are currently 43 building societies in the UK, with others across Australia, New Zealand, and a few other parts of the world.

In the modern age, building societies operate much like US credit unions, though focusing more on property collateral than a common bond. Increasingly, however, most building societies have needed to adopt more bank-like attributes to compete with traditional institutions, such as sort codes.

Today, the average person in the UK is unlikely to know the difference between a bank and a building society. Yet, the distinction remains clear enough that the building society faces unique challenges that the traditional bank does not.

Let’s look at five of the unique risks building societies are facing in serving their members:

1 – Building societies are not banks

Banks are owned by shareholders, and so the goal of a bank is to maximize profits and growth. Building societies are in a different position.

Of course, they still need to be profitable, and to grow in order to stay competitive in the market. However, their primary goal is always to serve the needs of the members who act as de facto shareholders of the institution.

This brings about unique benefits and challenges. Every company talks of putting its customers first, but building societies are able to do so without worrying about shareholder interference. However, diverting funds away from member services for special projects like transformation can be difficult.

This leaves building societies in a “catch-22” situation where they need digital transformation to better cater to members, but can’t divert the funds to doing so as members demand they focus on their immediate needs.

2 – Shifting demographics and customer expectations

The most significant threat to the banking industry as a whole in the present day is shifting customer expectations. This is even more of a concern for building societies.

To stay competitive in the market, they need the cost savings that automation and digital tools can bring. Otherwise, they will see their competitor’s costs drastically reduce while they fight for every penny they earn.

However, the existing members of a building society are likely not focused on the benefits of this kind of transformation. We know 70% of digital transformations fail with no return on investment, so a risky transformation that doesn’t benefit existing members is a tough sell for building society leaders.

Yet, as Millenials and Gen-Z become the dominant customers in the market, it becomes impossible to attract new membership without the digital services that these generations prefer. Without a transformation, building societies could lose considerable market share.

3 – Building societies have atypical customers and close links to mortgage lenders

Building societies were created to help consumers invest in property, so they remain closely tied to the mortgage market. About half of the 43 societies in the UK consider themselves to be specialty mortgage lenders.

Historically, the average building society has worked closely with their broker network to service atypical customers. All this makes them an unappealing candidate for digital mortgage automation systems that are not designed for their way of working.

This leaves building societies having to choose between systems that don’t mesh with their partners, or manual systems that are expensive in both resource and cost.

4 – Increasing regulatory oversight for building societies

Gone are the days when digital innovation was the Wild West, where anything goes. Regulators are now looking hard to bring innovative digital services under legislation.

Far from being spared this pressure, even building societies that are less technologically mature will still need to make rapid changes under new legislation and guidance. Here, not being fully digital once again causes issues, as legacy systems simply weren’t designed to be easily adapted to new processes the way innovative digital architecture is.

For example, the approaching UK Customer Duty program will require all products and service to be “specifically designed to meet the needs of the customer”. While a customer-first ethos will give them an initial leg up on this, creating new products that fit the needs of modern consumers will be increasingly expensive.

5 – Uncertainty about the future

Finally, building societies are facing the same concerns that we all are: worries about what’s to come. As all signs point to a coming global recession as we all pay the bill for the unavoidable COVID-19 response, tough times are approaching.

With the particular hit that the UK economy and especially UK interest rates have taken in recent months, both building societies and consumers are rightly worried. Thankfully, building societies that put members’ needs above financial security are an attractive prospect.

Communicating that to younger consumers, however, requires showing them that you are catering to their needs, which legacy technology is unable to do. Offering innovative digital products that put consumers first on their pathway to home ownership is an attractive prospect.

Far from going extinct, building societies could thrive in this difficult environment by helping their customers do the same.

How FintechOS can help

Building societies need a cost-effective way to offer innovative digital products to attract new members without disrupting existing members or putting them out of pocket. The FintechOS platform’s digital-on-top approach empowers building societies with the “digital glue” they need to combine innovative digital products with their existing system and create an affordable, effective tech stack to support their efforts.

Our platform allows you to build new products and launch them to market fast, whatever stage of digital transformation you’re at. We then empower you to customize those products and connect and embed them wherever you need to. You’ll then be able to manage and iterate on those products at any time using our low-code interface. All this at a price that won’t give pause to building society members.

To find out more about how the FintechOS platform can empower building societies to thrive in the current environment, book a demo.

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