FTT Embedded Finance


Building Societies: The Digital Challengers?

While the UK banking community debates the competitiveness and viability of new FinTech entrants, challenger banks and innovative, customer-focused product offerings – real disruption to the industry may emerge from an established and long-standing group – Building Societies.

While the FinTech revolution evolves and matures, the overarching aim is to deliver better outcomes to end users, whether through more responsive and personalised products, reaching the previously un (or poorly) served, and doing all of that cheaper, better and faster. Large banks still dominate the consumer and business landscape but many building societies, having taken on the digital mission, are bringing themselves firmly into the digital age. Part of that mission is recognition that the mantra of competition and disinter-mediation has been replaced by collaboration and partnership.

The time has come to look towards the UK’s established Building Societies as true ‘challenger banks’ (if that term can be applied to institutions some of which are well over 100 years old). By their very nature they are organisations created with the intent to better serve communities and customers through better knowledge and understanding of both. Building Societies, embedded in and serving their communities for a long-time, were largely unscathed by the reputational damage inflicted by the financial crisis and continue to exist to serve their members.

Building Societies are well positioned to leverage the benefits of technology to better serve their existing customers and gain new ones, allowing them to largely skip the hurdle in winning over customers in what is a largely trust based relationship. They already have what the new challenger banks seek (customers and trust) a portfolio of profitable and necessary products (e.g. savings and mortgages) and can benefit from the democratisation of access to technology. This should position them as worthy alternatives to both the incumbents and new challengers.

James Barker, Northern Europe Regional Director at Mambu notes that “Building Societies are starting to innovate, but from my observation urgency is far below what the situation merits. The threat of disruption to the building societies is very high, with their traditional passbook brick-n-mortar customer ageing-out. However, I agree the opportunity for them is great. Their customer base already centres around a far more profitable set of products (mortgages & deposits) than neos and they have established trust from the market. They need to make themselves stickier from a customer experience perspective or risk being turned into ‘dumb pipes’ feeding their product into other FI’s experiences.”

Policy-based initiatives, such as the PSD2 and Open Banking are not just for FinTechs and can underpin innovative new products for the customers that building societies serve. If access to data is all about better understanding customer need then their long-standing role in their communities gives them a leg up on the further potential of open APIs. Nationwide has a clear digital innovation strategy and has partnered with and incubated a range of FinTech companies. The UK’s 44 other Building Societies need to bring digital innovation to the forefront of their strategies.

Newcastle Building Society was the first Building Society to launch a debt advice tool (developed by Paylink Solutions) utilising open banking tech. By quickly aggregating the customers data (with their permission, of course), their financial situation can be assessed, and accurate advice provided. Partnership and collaboration can serve the building societies with just as much impact as it has the challenger banks and the incumbents.

Created to enable the pooling of community resources so that members could purchase a home (crowd funding in the pre internet age), building societies have a clear opportunity to deliver innovative mortgage products and improve the processes of the existing product portfolios. As noted by (former) Director of Digital & Innovation, Ant Warrington, at Yorkshire Building Society, ‘digital disruption is “only just starting” in the mortgage and savings market…For years, fintech challengers and innovations have been focused on current accounts and payments. Now, we’re seeing mortgages become essentially a digital business.”

Looking ahead and thinking beyond the much-discussed millennials, building societies need to think about their next generation of customer. Again, their history, structure and community-based roots can help them reach, albeit through digital channels, the Gen Z customer, who according to recent research by McKinseys, are much more likely to make purchasing decisions based on the ethics of a company. This is clearly a position that fits well with the building society mission statement.

Building Societies comprise of a pool of institutions with over 25 million customers, many of whom who are formulating a digital strategy and are well-aware of the changing dynamics of the industry. A recent survey measuring the digital maturity of the sector noted some progress and some clear frontrunners on the road to digital transformation.

From a strategic perspective, Barker notes “For those building societies that simultaneously feel the opportunity as well as existential risk, they need to invest more in building small digital-native units in-house. For too long many have been almost wholly dependent on outside expertise, which has resulted in them being unable to tell new technology from old stuff that’s been rebadged and dressed up. These technology teams don’t need to be large scale development houses, but they need to be digitally native with the objective of making the Building Society more savvy at buying, orchestrating and connecting genuinely transformative technologies in a way that delivers impactful change in how their products are delivered.”

The Covid-19 crisis has brought the necessity of digital provision front and centre but also highlighted the importance of being there for your customers when they need you the most. The power of technology driven start-ups, partnered with long-established community-based institutions could well deliver a compelling challenger proposition.

We are currently working on a project focused on innovation in Building Societies and are keen to hear from innovators both from within those institutions and outside of them who share the sense of excitement and possibility over the future. Please get in touch with Laura Camplisson to share your views and experience and watch this space for exciting announcements over the coming weeks.