Rob Evans, managing director, Paymentshield
The pressure on building societies to diversify is tremendous. Capital requirements in the low-risk, low-LTV markets mean only the largest societies can compete, while the relaxation of PRA rules almost encourages societies to expand into new areas.
Human nature is also in play. Doing something interesting, not being left behind and making a name for ourselves are all powerful emotional drivers.
That said, the opportunity and desire to diversify are not enough. After the crash, the result of poorly designed and executed expansion saw a fifth of societies cease to exist and a bruised reputation for the sector. Trying to compete with banks by acting like banks was not the answer then and is not the answer now.
‘Stick to the knitting’, then? Not quite. Financial services and customer behaviour are changing rapidly, and building societies are well placed to succeed. With no shareholders draining funds, mutuals are in a unique position to plan and invest for the long term. Their roots in community and social enterprise also set them apart, and chime with customers’ changing attitudes. These are the ingredients, along with some courage and vision, for future success.
The insurance sector is experiencing this too. Comparison sites have had huge success by competing purely on price. Direct-to-consumer insurers are spending millions on advertising. Yet we’re achieving record sales and customer numbers, and start-ups like Lemonade are rapidly grabbing headlines and market share. Why?
Our research shows that many customers are deciding not simply on price. Convenience, service and social ethos are increasingly important, especially among time-poor millennials, who will be the members of the future.
Trying to compete with banks by acting like banks is not the answer
The challenge is understanding and utilising new technology, big data and behavioural economics to create the efficient, hassle-free experience and emotional connection customers increasingly expect. Diversification, if it takes time, energy and resources away from this, will be at best a distraction and at worst catastrophic.
How customers select and interact with financial services providers is evolving rapidly. A well-run, ethical, mutual, technologically innovative and service-oriented building society will win.
Ray Boulger, senior technical director, John Charcol
Building societies are generally regarded as traditional lenders.
If one subscribes to a dictionary definition of ‘traditional’ — “old-fashioned” (Collins), “habitually done” (Oxford) or “following or belonging to the customs or ways of behaving that have continued in a group of people or society for a long time without changing” (Cambridge) — then yes, building societies should diversify into new lending areas.
In today’s rapidly changing business environment, any established organisation that was so set in its ways that it had not already diversified probably would have gone under already. Therefore, the real question is not whether building societies should diversify, but how.
There are important lessons to learn from the recent past. A key reason why several societies had to be rescued in the late 2000s was that they had expanded into the commercial mortgage sector without adequate understanding of that market. Their mistake, driven by surplus capacity in residential and attracted by higher margins, was to expand too far into this very different mortgage sector without sufficient specialist underwriting skills and controls.
The market is constantly adapting, with economic and regulatory changes being key drivers, and building societies need to respond or get left behind. This presents challenges, but also opportunities. Properly researched and considered diversification, based on a full understanding of the risks, with new specialist staff being recruited if necessary, can enhance a society’s reputation and help to expand mortgage availability in poorly served sectors.
The real question is not whether building societies should diversify, but how
Opportunities for smaller lenders, which include most of the UK’s 44 building societies, come from manual underwriting and the ability to react quickly when market conditions change. A good recent example is later-life lending, where, apart from lenders in the lifetime sector, most innovation has come from smaller building societies. This will put them in prime position when the FCA’s new rules on retirement interest-only mortgages are introduced next year.
On the savings front, Skipton is still the only provider of a cash Lifetime Isa; a good example of a building society leading the way in diversifying into a new savings product that will increasingly be used by potential mortgage customers to save for their deposit.