Building societies have been around for a very long time – 232 years to be precise.
Over that time, these organisations have developed and changed the way that they provide products and services to suit the market and continue to work to provide good value to their members.
Indeed, most building societies now offer a suite of savings, investment, mortgage and insurance products. But as the market continues to evolve and the margins available on products shrink, how can building societies develop and continue to offer good value products while still covering their running costs and maintaining reasonable profits?
Holy grail
Now this is the question that needs to be answered – the holy grail of the building societies world. One way in which some societies are tackling this problem is through offering complementary white-label products to their customers.
After all, if Mrs Smith trusts you to provide her mortgage, the chances are that she will buy insurance from you. Admittedly, not all of these products provide huge income streams but as one of the supermarkets says, ‘every little helps’ and providing customers with a holistic service is something that breeds loyalty in the long term.
Another option that can – in effect – subsidise a society’s core product range is to offer ‘high-margin’ services outside the organisations normal core offerings. This is an area in which building societies can flourish as due to their mutual nature, they have turned cost-effective back office management and product administration into somewhat of an art form.
Some excellent – and topical – examples of this are Newcastle Building Society’s endeavours in the pre-paid card and back office administrative arena and Skipton’s acquisition of 19 subsidiaries. Indeed, I would imagine these have been useful additions to each of these company’s profit margins.
Intermediary brands
Another answer to this question is to ‘diversify’ your customer base or find new routes to familiar markets. This has been particularly popular and we have seen the launch of a wide selection of intermediary brands including Godiva Mortgages from Coventry Building Society, Astra from Norwich & Peterborough, and Salt from the Derbyshire Building Society.
These intermediary lenders tend to focus on the non-conforming sector of the market or other areas that building societies would not have traditionally operated in.
While launching a broker lender is an excellent idea, there has been some controversy around launches backed by some building societies. One of the most common criticisms is that some have been accused of simply re-packaging existing products under a different banner rather than catering for their new target market. This is certainly not the best way to go about expanding your income streams and may do more damage to a reputation than good.
An additional option that some building societies are using to expand their business is catering for niche or specialist markets. Prime examples of this are buy-to-share mortgages, green products and the divorce mortgage – all examples of thinking outside the box and therefore drawing in customers that might normally not have been attracted to a building society. After all, as we mentioned above, once a customer feels loyal towards a brand, they will purchase further products in the future.
Asset rich
Finally, building societies have traditionally – as guardians of the UK’s savings – been asset rich. More societies are using these funds to purchase high quality, low risk mortgage books or the like. This move not only provides the societies with a way of putting their assets to good use but also allows them to gain more experience in mortgage markets that they may not directly operate in. This is also a great way of testing the waters before committing to providing these products through their branches or agencies.
While it seems that building societies need to find ways to subsidise their core product ranges through diversification, the holy grail isn’t unobtainable. Indeed with so many options, it is rather the question of making the right choice for the society than finding the solution.
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