Building Societies: time to re-think business models?

Is the building society business model in danger? With squeezed margins, new digital entrants and rising customer expectations, how can business leaders pave the way to develop new revenue streams, whilst maintaining the USPs of building societies’ offerings? We asked Des Moore, Chief Executive Officer, Cumberland Building Society to get his thoughts ahead of MoneyLIVE Building Societies this June.

Why is there a need for building societies to re-think business models?

Societies are facing challenges across multiple fronts; there is a perception within younger audiences that regional / old fashioned, typically branch-based societies lack relevance in an increasingly digital landscape. The regional model itself is under threat from ageing regional demographics; we need to ask ourselves where we are going to find new customers when we see existing market share saturation in our core areas. Furthermore, our margins are under threat from overcrowded key segments, misdirected government support creating competition from ringfenced banks and new technologies such as open banking and price comparison sites eroding traditional levels of price insulation. Add in the need to continually update legacy technology capabilities in our heavily regulated market and the need to re-think how we operate in the future is obvious.

I also think we have a role to play in supporting customers through a potential recession and the cost of living crisis, particularly in areas where branch closures have left gaps in service for more vulnerable members of our communities.  We at the Cumberland operate in the most rural area in England and in many cases we are the ‘last branch in town’. We are proud of being so as it helps us meet our purpose but it has to be financially viable too. We can only do that if we continue to evolve to be simple in our operations, relevant in the channels customers want to interact with and offer the right products with the best level of service we can.

What are the various routes societies can take when looking to diversify business models?

How do you diversify traditional, purpose led societies operating in areas of core saturation? We need to leverage our core advantages of customer service, a strong community purpose and a focus on lending across the opportunities both within and without our regional bases;

I think there are two key focus areas for building society diversification;

1. A journey towards operating in valuable niche segments that are traditionally under-served in the wider industry. In our area we have identified niches such as holiday lets and complex, intergenerational residential mortgages where we can offer a personal, flexible level of service allied to the right credit risk appetite.
2. New distribution channels enabled by technology. We offer great products. We need to move away from solely branch-based or other non-digital distribution channels. Aggregator sites and the increased use of brokers offer a great opportunity to broaden our reach relatively easily in non-complex lending and deposits.

The above needs to be enabled by a focus on customer journeys, efficiency and driving down costs effectively. This might mean a full technology transformation or piecemeal changes in processes, but this is a vital hygiene step given the advances other providers have made, and it goes without saying that we need to defend our core segments of regional residential lending in order to fund these transformations.

In our favour we have our brands and their distinct heritage, but we need to keep re-vitalising and pushing these too. Defining what we stand for – authentically – is vital as consumers, commentators and other stakeholders are increasingly scrutinising the purposeful activities of the brands they decide to work with.

“Our core purpose has and always will be to serve our local community and any change in business model should preserve this at its core.”

Continuous innovation is important but so too are maintaining USPs and core values. How can societies 1.) identify USPs successfully and 2.) adapt business models without compromising on core values and USPs?

We’ve identified our USPs by getting out and about in the local community, talking to our personal and commercial customers and really getting to the bottom of why they do business with us and what else they need us to provide. We also work with external consultancies to help us understand how we interact with the market, changes in attitudes in our customer base and where the opportunities are.

Our core purpose has and always will be to serve our local community and any change in business model should preserve this at its core. This means that any change should be aimed at better, smoother customer service by enhancing the channels that customers now want to use to interact with us or reductions in operating costs so that we can pass that on to our members in the form of interest rates.

The advantage we have as a smaller, more nimble organisation is the level of personal attention we can give. We pride ourselves in being able to move quickly to escalate and fix issues for customers by empowering our staff to connect with customers directly, not hide behind letters and procedures.

Having a physical presence will always be fiscally contentious, where we compete with solely digital providers, but it comes back to our purpose as societies. Our customers want and feel re-assured by a physical presence and being able to interact with human beings they know and trust.  We can use technology to free up our people to focus on meaningful and complex interactions with customers such as mortgages or saving for the future rather than routine transactions. This is even more important in communities where other banks have moved out.

Any transformation needs to have the question; ‘how does this impact our members and the local community’ as the first step in any decision tree or ‘Yes’ check.

“Any transformation needs to have the question; ‘how does this impact our members and the local community’ as the first step in any decision tree of ‘Yes’ check.”

Before we wrap up, what are you most looking forward to at MoneyLIVE Building Societies?

I’m passionate about the way our societies are uniquely placed about to help customers meet their financial goals in the right way – not sacrificing the environment or how we serve the most vulnerable for profits. I look forward to discussing how we can continue to do that with likeminded peers and experts. On a personal note, I am intrigued as to what I can learn from the event and how I can challenge my own thinking and bring anything useful back to my business.

“I am intrigued as to what I can learn from the event and how I can challenge my own thinking and bring anything useful back to my business.”