The key report findings relating to mortgages are outlined below:
Societies are enjoying strong savings performance and do not currently face significant issues attracting new deposits
By the end of 2020, savings balances at building societies had increased by £1.9 billion, a 5% share of the £36 billion across the market. Total savings balances at building societies stood at £297 billion, equating to 18% market share of the total £1,718 billion across the UK. These statistics are echoed by the sentiments shared amongst the sector surrounding the strong inflow of savings and their performance outlook for the future.
As a result, for the majority of the sector, attracting funding has not been a key concern with some even stating that they are experiencing a liquidity spike. This appears to be in part due to the Bank of England’s TFSME scheme (which allows eligible banks and building societies to access 4-year funding at rates very close to Bank Rate), but also partly due to the accessible funding resources that core savings customers provide.
For most of the sector, the older demographic profile of their core savings base means that it is often the case that savings balances are substantial and that deposits are regular. As well as this, the member base continues to have extremely low attrition rates and so the likelihood of savings customers remaining with a building society for a number of years is generally very high.
The importance of financial resilience and the need to save has been highlighted during the pandemic
For certain demographics, household savings are currently at an all-time high. The percentage of disposable income saved between April and June last year was 29%, more than double the previous record of 14% set 27 years ago. The coronavirus pandemic has been identified as a key contributing factor to this as consumer spending has been at an all-time low. It is important to highlight that for the younger demographic who were affected disproportionally by job losses throughout the pandemic, there has not been the same increase in household savings seen. However, as they do not reflect the core savings base for building societies, this does not appear to have affected the strong inflow of funding experienced by the sector.
In relation to the increase in household savings, there also appears to be a reawakened acknowledgement of financial awareness and its importance for ensuring society has the resources to cope with an economic crisis similar to the one we are experiencing now.
Research shows that the situation was different pre-Covid. Legal & General has found that pre Covid-19, over one third of people in Britain had less than £1,500 in savings, and 15% had no savings at all. Yorkshire Building Society has previously estimated that 11 million people in the UK were non-savers, and the Household Savings Ratio reached a record low 2019 with households saving just 4% of their disposable income (down from 10% in 2015). In addition to this, ONS has highlighted the specific savings crisis amongst younger generations with 53% of 22–29-year-olds having no savings.
There is a sense amongst the sector that going forward, society may be more encouraged to save. Not only does promoting effective money management suit the business model of building societies, but more importantly for the sector, it also aligns well with mutuality and the social purpose of many building societies who are committed to supporting their members, especially in testing times.
Interestingly, however, the results from the online survey we conducted revealed that only 25% of building societies are considering digital money management tools as a priority for the next 2 years, suggesting that despite an acknowledgement in the shift towards saving, many in the sector may miss out on positioning themselves at the forefront of digital developments in relation to this agenda.
That being said, it is difficult to predict whether the trend towards saving is a long-term behavioural shift or whether the easing of coronavirus restrictions will spark a surge in consumer spending. According to the Office for Budget Responsibility, despite £180bn in savings being built up between the start of the pandemic and June this year, “there may be a degree of euphoria once the pandemic is past, leading households to wish to treat themselves.” In support of this, research by Scottish Friendly found that households intend to travel more, take more holidays and go out to eat in cafes and restaurants, spending around a quarter of lockdown savings that have accumulated since the pandemic curbed activity in March 2020.
Andy Haldane, Bank of England chief economist, has been convinced since last summer that the unusual situation unleashed by the pandemic makes Britons likely to splash the cash as the economy is waiting “like a coiled spring”. Karen Ward, chief market strategist for JPMorgan Asset Management, echoes this sentiment, and believes that because these are not “normal savings”, in that they have not been built up with a long-term ambition in mind such as to buy a house or go on holiday, they could be considered “forced savings” and so the propensity to spend them may be higher than it would usually be.
The requirement to provide online savings propositions is acknowledged and being acted upon by societies
Looking forward, 77% of online survey respondents predict that digital/ challenger banks will be a key competitor for the sector over the next 2 years which would suggest that although there are no immediate concerns over funding, the sector is not complacent about their position within the savings market. FinTech enabled features such as automation, round ups, marketplaces/platforms, goals, and savings pots have all become increasingly prominent over recent years and in the report we provide some examples from outside the sector.
Whilst the majority of current building society members may not be demanding increased digital capabilities from the sector, there is recognition that in order to ensure sustainability, digital adoption will be necessary for both backend efficiency and customer propositions, particularly with regards to savings. In support of this, 51% of online survey respondents strongly agree that technology adoption will be required in the savings market over the next 2 years to reduce costs and enable competitiveness.
In alignment with this view, according to ONS, the adoption of online banking in the UK was steadily rising pre-pandemic and has since accelerated resulting in a noticeable increase in adoption from both younger and older demographics. Though it is appreciated that the current saver base still largely makes branch-based deposits, the societal shift towards online banking does appear to have encouraged the sector to progress with their digital roadmaps sooner rather than later with some societies choosing to prioritise their online savings proposition ahead of other digital plans.
There is the potential that digital channels will drive commoditisation of the savings market, fuelling tactical customer switching, representing a potential threat
It can be argued that the savings market may come under threat from commoditisation. Research conducted by Deposit Solutions shows that 20% of British savers are considering switching savings account in the next year and that British consumers report changing savings account provider on average every seven years. The research also concludes that when considering switching savings accounts, consumers are far more likely to make a practical decision with 63% identifying interest rate as a key motivator. Thus, implying that the savings market is extremely transactional, and rate driven.
However, interestingly, this research provides a stark contrast to the behaviours demonstrated by building society members who as mentioned previously, exhibit extremely low attrition rates with 73% of CEOs stating that they attract long-term, stable funding. For building society members, the opportunity to make physical transactions at that branch appears to continue to be more important in comparison to more attractive interest rates or advanced digital propositions.
Building societies are performing strongly in the savings market and a continued societal move towards a savings culture in the UK should be a positive for the sector. Enhancing digital capability is acknowledged as important but building society members appear to possess a different set of priorities to the customers of other bank or FinTech challengers, which means an enhanced digital proposition is strategically important but not a short-term imperative.
Background to report:
Building Society Sector Analysis 2021 – A review of the strategic landscape for building societies
The research underpinning the report was conducted by Whitecap Consulting in partnership with the BSA, and involved a quantitative data analysis of all 43 building societies, interviews with 33 of the building society CEOs, and an online survey which received a total of 134 respondents.
This analysis and report was funded through sponsorship from a number of industry stakeholders including: Credera, DPR, EQ Credit Services, Mambu, Moneyhub, Mutual Vision, Nivo, Sandstone Technology, Sopra Banking Software, Shoosmiths, and Phoebus Software.
The eight blogs in this series will focus on key topics addressed in the research: FinTech, Strategy, Mutuality, Regionality, Technology, Mortgages, Savings, and Open Banking.