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A matter of choice

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  • 17/06/2002
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Can building societies survive in the increasingly competitive mortgage market? A building society and a plc put their case forward.

Britannia Building Society

By Graham Stow, chief executive, Britannia Building Society and chairman of the Building Societies Association

Building societies are at a crossroads, but they have never been better placed to exploit the opportunities available to them ‘ provided they are bold and imaginative.

New challenges arise or old ones get bigger. Market pressures remain intense and pricing grows ever more competitive, placing margins at an all time low for many societies. This is good news for the consumer, yet the pressures of consumerism only intensify, with each month bringing a new issue in the press.

Yet the industry remains successful, confident and optimistic about its future. Building societies deliver good value to their members, they are more democratic than other business models and they have largely won the battle about the virtues of mutual ownership.

The mutual agenda

What societies do over the next few years will dictate whether they consolidate this position and ensure they are recognised for their success and their contribution. The alternative is seeing a further erosion of society numbers being left with a handful of, albeit, successful businesses whose influence will be negligible and whose mutual status will be irrelevant.

It is vital that building societies should set the mutual agenda, not the Government or carpetbaggers. The Government is clearly sympathetic to building societies, but I do not believe we should look to them for any further initiatives in support of mutuality. The Co-operative Commission was an interesting model. The Co-op laid out its stall and then succeeded in generating powerful Government support for its aims and objectives ‘ an example societies could follow.

Building societies are on the side of the consumer. Yet an effective Ombudsman service is good for our business as, inevitably sometimes we will make mistakes. Some form of effective redress for members is necessary and important. It is vital the industry and the Financial Ombudsman Service work together.

Democratic engagement with the membership is crucial. In an age of consumerism, people have become used to challenging the norms. Societies might have won the battle on mutuality but if carpetbaggers are now to be re-born as ‘democrats’ then societies will inevitably face questions and challenges on all aspects of their corporate governance and accepted practices. They have made much progress in these areas in recent times.

We have to acknowledge carpetbaggers have made societies look not just to their defences, but also to ways in which they can engage the membership more directly in their affairs.

The next challenge is likely to be the disclosure of directors’ pay and voting on remuneration policy in light of a DTI consultation paper. As on most issues, societies have little to be ashamed of and much to boast about. They must be bold in telling members what they do and in finding new ways to engage them in dialogue. It is the members who will ensure societies’ survival by giving them their business and support through the ballot box.

All societies, big and small, are important to their local communities, which provide the bedrock of their support. Societies contribute much to their local communities in terms of wage cost and donations, Britannia, for example, is the only provider of well-paid jobs on any scale for probably 20 miles around us.

The challenge is whether we can do more. We live in a multi-cultural society, but is this reflected in societies’ workforces? Equally, a review of the top management teams shows a marked lack of senior women executives. Building societies essentially remain businesses staffed by women and managed by men.

Mutuals cannot afford not to maximise all the skills of a diverse workforce. Reflecting the ethnic mix of local communities also brings business from those communities. By pursuing equal opportunity policies, societies can cement their position in the local community. Achieving a reputation as forward-thinking, progressive employers fits well with mutuality and its values.

The challenge ahead

If building societies are to prosper going forward, they have to think radically about how they do business.

We have seen good examples of product and branch innovations and societies developing exciting approaches to e-business. The area where the real challenge lies is how individual societies can collaborate more closely.

For small societies especially, the challenges from the market and consumers are great. Yet it is the wide diversification of societies that gives such value to their members. Societies have to find ways of working together, sharing costs and ideas.

Some good work has already been done in this area. Mutual One showed the way and MutualPlus, the branch sharing scheme between Britannia and the Yorkshire, is working well. We have seen the establishment of the new technology partnership Mutual Vision Technologies and a buying consortium made up of half a dozen societies is bearing fruit. These are all important initiatives. However, the challenge is to see how much further we can go. Is it possible to share some of the core services? Can societies find a way to share processing and call centres?

I am convinced that if any industry can make the radical changes to enable joint ventures of various kinds then mutual building societies can. Goodwill already exists, the dynamic to motivate us to collaborate is very strong and the prize at the end worth achieving.

Halifax plc

By Mark Hemingway, spokesperson for Halifax plc

Building societies have always claimed to take the moral high ground, but this has not helped them keep their market share, so what is the future for the mutual societies?

Since their birth in the 1770s, building societies formed the base of the country’s saving and borrowing. Through the following 200 years, they expanded in number and geographic reach only to see their numbers shrink again through termination, mergers, acquisition and flotation. The movement peaked in the 1860s, at over 3,000, but today there are just 65.

The Building Societies Association says because societies are mutual and only have members’ interests to consider, they can offer more competitive rates on mortgages and savings.

But the leading building society has seen a drop in mortgage business in the past year, despite offering the lowest standard variable rate on the market. So why are the mutuals not attracting more business and dominating a market driven by price?

The simple answer is choice. The variety of products and services available to customers has never been better, with hundreds of products to choose from. A customer can find a product that suits their needs and their lifestyle. And for many building society customers, they would now be better off elsewhere on price alone.

Legislative hurdles

The legislation under which building societies operate also limits the way they operate. Plcs have easier access to wholesale money markets than building societies which must derive the majority of their income from mortgage business.

This creates a paradox. The area of their business they promote as the cheapest, compared to the banks, also has to generate the biggest part of their profit. So how can they continue to do this against competitors of greater size, flexibility and resources? Credit agencies criticise societies for dipping into reserves to support competitive pricing. Continuing this strategy will affect their liquidity and credit quality leading to problems in the future. Building societies are also infamously expensive to run. A large building society has a cost: income ratio of around 50%-60%, much higher than one of the bigger banks, operating nearer the 40%- 45 % mark.

Weighing up the options

To keep up with the market and survive, the options are conversion, acquisition, mergers or aiming for niche markets. The conversion/acquisition route causes problems for most, if not all, societies for many reasons.

The majority of societies are opposed to conversion, a question of ideology above business decisions or member consideration. For any converting, the question is ‘could they survive beyond their protected period without being taken over’?

Already the smaller of the recently converted societies are facing the question of survival, with some of the biggest players looking to make acquisitions. The open market is difficult and success is no guarantee of survival ‘ it can just make the business more desirable.

The message, if societies are to survive, is ‘size matters.’ But bigger is not necessarily better, greater size, derived through mergers must also bring with it cost savings. And for the smallest of societies they must find the right market to operate in.

Last year saw another two smaller societies disappear, with Gainsborough and Ilkeston transferring their business to larger societies. For some this will seem like the only option and it is likely more consolidation will happen in the future.

The bigger societies will assimilate the smaller ones and the medium-sized societies will merge together to form big societies.

This will leave behind the smallest societies and a few medium-sized societies still looking for a partner. Provided the new ‘super-societies’ use their size to look at economies of scale and address their cost bases, then they may have a future as mutuals. The increase in customer base and, in some cases, geographic reach will provide opportunities for cross-selling and increased profits. These profits themselves must be used wisely and the balance between customer returns (margins and loyalty bonuses), reserves and reinvestment must be found.

For the smallest societies it is critical they play to their strengths. These are the things that drove the birth of building societies back in 1775 ‘ giving the opportunity to buy a home to those people who would otherwise not have it. Here there are two avenues to pursue; small geographic areas and niche markets.

The strength of societies used to be that they were local, run for the benefit of local people, whose circumstances they understood. This is something financial services have since moved away from, but there is still a market for local solutions for local problems.

The other avenue is the niche market with a wider geographic range. Here, societies could specialise in one area of the market. For example, Ecology BS targets a section of the market with an environmental payback.

This is a route others could follow with other sections of the market: sub prime, new families, or former local authority properties. It is about finding a niche and developing it.

Building societies have a future and it is important they do to provide choice and opportunities to as wide an audience as possible. But there is a simple choice ‘ go big or go niche, because playing the middle ground will not be workable.


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