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• Speaker #0

  Welcome to FinTrans, the podcast series where we explore the hot trends and news in the financial sector with experts. In today's episode, we are diving into a topic that's especially relevant in the UK. I'm talking about the role and relevance of building societies, what sets them apart from traditional banks, why do they still matter in a digital first world, And how are they adapting to the evolving expectations of customers? So to help us explore these questions, I'm joined by Ben Verdin, Head of Product Strategy and Management in the UK. And we're lucky to have him because Ben brings deep insight into how building societies are navigating the balance between digital transformation and community connection. But before we get into it, Ben, could you start by briefly introducing yourself to our listeners?

• Speaker #1

  Of course. So, Ben Verdin, I'm Head of Product Strategy and Management, as we said, for our UK lending business as part of SBS. So, our UK lending business looks after a product portfolio in the UK across both the mortgage and savings market. We primarily look after customers that are building societies, having 50% of building societies within the UK. But we also look after some of the big tier one banks in the UK as well from a mortgage perspective. So that's what we'll be talking today to cover. I also look after the other side of the product portfolio. I look after our specialist lending product portfolio as well. So that looks at vehicle leasing products, but also specialist lending products like development finance and bridging.

• Speaker #0

  OK, so first for our listeners who might not be familiar with the concept. Can you explain the main differences between a bank and a building society?

• Speaker #1

  Yes, there's three main differences I would say between a building society and a bank. The biggest difference is that building societies are there for the good of their customers and their customers are actually referred to as members. So instead of where you have in traditional banks where they are trying to increase their profitability for their shareholder value to report back to the board and to their shareholders, Actually, within a building society, they're a mutual organisation. So their customers are members, so they share in the profits of the building society. So those profits are reinvested back into building societies in the terms of better products and services, so better rates on savings accounts, for example, or mortgage accounts. But also they are part of their community, so they reinvest a lot of their profits back into community, either through local charities. So that's really their purpose is very different from a traditional bank within the UK. Secondly, their product suite is slightly different to banks as well. They don't have current accounts or they don't have other sort of traditional banking products. They are purely focused on mortgages and savings, but they actually go into a little bit more specialist types of mortgages and savings as well, because they're seen as more high touch, having personalized relationships with their customers. or their members, that means the building society can tailor their offering to their community and to the types of customers that they serve. So they have things like buy-to-let mortgages, they have retirement interest only mortgages, they have expat mortgages. And then for example, one of our customers, Teachers Building Society, they only look after the teacher community within the UK and only provide products and services to them. So for a product set, they're different as Well, and then finally... They are typically regional as well. So where retail bank within the UK, they are typically national or global in some cases. Building societies are a very typical part of and integrated into their communities. They are regional building societies. Now, there are slight differences to that. So Nationwide, again, who are a customer of ours, they are a national building society, but it's rare to have national building societies. They're all spawned from being regional and part of their communities. So those are the three main differences between building societies and banks.

• Speaker #0

  Okay. They seem very attractive, building societies. How can banks keep up?

• Speaker #1

  So it's interesting so where building societies really find their niche I think is going back to like I say they're very part and integrated in the communities how the struggles that building societies have is really when it comes to market share so if you look at your traditional banks of me myself as a customer within the UK My retail bank or the bank that I use for my current account also does my mortgage as well, just because of the ease of it. So that's really where some of the building societies have struggles within the market in terms of gaining a market share, because actually their customers are brand new customers. They're not customers that they pivot from their current accounts. So that creates a sort of a challenge. I think from a banking perspective, they've got a huge market share already just because they have those customers that do their core banking with them as well. and then they could offer products on top of that. of that so in terms of going back to your question around how do banks compete with the building societies actually it's what was more the other way like banks have the majority of the market share within the uk where building societies really look at integrating themselves into those communities and really providing better products and services and more high touch to attract customers to come to that building society but because they are regional they do struggle because obviously they are they only have a certain customer set that they can serve so it's all about them competing against banks. within that set region and really reinvest in those profits back into the products and services to attract new customers and to retain current customers.

• Speaker #0

  Okay. From what I understood, the difference in ownership models is important to people in the UK. Why is that so?

• Speaker #1

  A couple of different reasons. So, like I said, it's because building societies, customers are actually members and they're part of the society. They get to vote on big decisions. So who's the chief exec of the building society? They get a say in a lot how the building society is run and how those profits are reinvested back into the communities through charities or through better rates through their products. So there's an element of because you feel part of the building society and part of your financial services provider, there's an element of trust that comes with that because you contribute to a lot of the big decisions that get made. So I think that is really one of the biggest reasons why customers feel valued to be part of the building society is because they actually are members. and they do get to contribute to the big decisions that are made within building societies.

• Speaker #0

  As a consumer, What would I feel differently if I were to walk into a building society compared to a branch bank?

• Speaker #1

  It's a really good question. So we look after 50% of the building societies in the UK. And what I'd say is they're all at different parts of their journey in terms of transforming their branch experiences. But they all got the same goal in mind. They're all moving towards a relationship-driven service and moving away from transactional-level services within branches, especially as a digital adoption. grows within their customer set actually people just wanted to have the conveniencies online for making payments making changes to their accounts paying into their account for example So, as I was saying, the building societies are moving towards that direction of offering that more relationship-driven services within branch or more advice-driven services within branch. Now, what comes with that is actually they have to transition their space towards that more advice-driven and away from that transactional. So that really requires to foster those types of relationships within branches. It really requires building societies to set a new style of branches. so if we take a couple of live examples from our customers if we look at scottish building society for example they've renamed all of their branches to customer service centers so they're all really focused on having that sort of the customer relationship if we look at nottingham building society so they they opened their new branch at the beginning of this year and again their focus was really on how do i create a community space for our customers which more open planned more relaxed environment where customers can come in and just come in for advice they don't have to be making a payment or they don't have to be opening a product but instead how do i create environment that is open plan relaxed and really fosters those levels of engagement around just coming in for advice grab a coffee have some advice with with their customers and their advisors and that really is starting to change how you see building societies in the UK now so they've all got that north star of moving towards those advice driven services within branch but they're all just different parts of their journey I would say across the UK.

• Speaker #0

  Okay today we live in a world that is more digital and we are experiencing the rise of AI. So I was wondering what are the main challenges building societies face in today's markets?

• Speaker #1

  So if we look at the history of building societies, we mentioned it a couple of times, it's really driven on those personalised experiences for their members. It's all the advice driven, personalised, in-person, high touch experiences and engagements between the building society and their customers. Now, there's no getting away from it. Digital adoption is growing within the market. If you look at younger demographics now, a lot of their primary engagement channel with their financial services providers is purely through a mobile banking. in application. So they, building societies do recognise that the market is moving in that direction. However, A lot of the Building Society's customers today are of the older demographic, so the real challenge for them is going, how do I find the right balance between offering the in-person, high-touch relationships with the customers that still want it, still expect it, but also... Also, how do I start attracting the younger demographic through my digital channels? So that's really one of the main challenges that Building Society is focused today. So what we're doing is, so we release, we have a web and mobile banking application called our front office portal platform. So that is, and really we're looking to help our customers get that balance with digital as well. So keeping on enabling the investment into those products around the more transactional self-service capabilities. So we really start to attract those younger demographic then. So for example, in our latest release, we're bringing in a development, which allows customers to make a product switch through their digital channel, rather than having to phone up or go into a branch and say they want to move from one product to another. because really if you look at again you look at the the younger demographic that they're trying to attract or the the customers that are trying to retain something like that is extremely important to have those those convenient ease of services within the digital channels and then conversing that is look there's people still their customer base still expects in-person relationships and and also the younger demographics still expect in-person relationships for larger financial decisions as well so if they are looking to save money for a huge goal whether maybe we're going to university or buying a car or something like that or even looking at buying their first house i think the the level of interaction you need with a human is really important for that that kind of thing so we also conversely to the digital applications we're investing heavily in our new branch teller solution as well which is really enhancing the level of experiences that we have within branches to get a balance then where if you're a digital primary engagement channel customer and actually now you need to come into branch after two or three years of being a customer at the building society our solution is fully integrated between the two and we have a 360 degree view of the client so an advisor although they might have never met this customer before just capturing personal details for them is extreme they can just have a relationship and engagement with their customer that is almost like they spent a lot of time with each other they can see all the data they can see their personal circumstances they can see all the previous interactions they had so they can treat them as an individual and given that personalized experience even though this might be the first or second or third time they've ever met so that's really our focus is supporting building societies in that challenge and go look let's not not lose the mutual experiences in person personalized experiences let's get the right balance between transactional on your front end and then the advice in the branches and in person in recent years we've seen many high street banks closing local branches and we're talking about more than 6

• Speaker #0

  500 branches since january 2015 what are some reasons behind this

• Speaker #1

  So there's two reasons. I think the first reason is, and you saw banks doing it long before digital adoption really took off, even when the banking applications were fairly in their infancy. I remember when I, I mean, three or four years ago, actually, a lot of the stuff you couldn't really do through a mobile application. You still had to log on to the web banking application and do some of the bigger decisions in there. So even in that period where people were still coming into branches and experiencing branches and wanted those in-person relationships, actually banks were still starting to close branches just because of the increased infrastructure costs that banks had seen. So they really went through an optimisation process with this. So they looked at the footprint that they currently have, they looked at the throughput in the particular branches, the popularity of the branches, and then also the population density of their customers, and then really optimised their footprints. They did reduce the number of branches, but they really optimised the locations of those branches to ensure they, again, similar sort of topic we're discussing, how do they get that right balance between the in-person. and the digital interactions. So that is really one of the main reasons why banks did start to close branches and they're still continuing to close them. Second reason is obviously the digital adoption piece. Now that is really taken off. If you go on any sort of, it used to just be the neobanks that have really smart applications that you can do all self-services through the mobile app now. Now, if you look at most of the banks in the UK, you can do exactly the same and have the same level of service. So obviously as that's starting to grow, there's less people going into branches because there's less need. to go into branches now so that's really driven closure of branches even further now what i would say actually the branches that have remained a significant amount of investment has gone into those branches so we're now seeing actually although physical branches are closing and their numbers are reducing we're now seeing more pop-up branches or more advisors in community centers or visiting their customers independently so for example to take something from my experience I'm a Barclays customer within the UK. problem with my web banking application and actually phoned up couldn't do anything about it tried through the application couldn't do anything about it and the only thing that they suggested look you've got to go into branch and reset it do your identity checks all of those sorts of things so i went online and go look i don't even know where my local barclays branch is anymore because the local one closed a number of years ago put my address in and actually multiple different options came up there's a branch in the local car park there's a branch in the garden center that was close to us as well and then there was a physical branch a little bit further way so i had quite a lot of choice so although the physical branch locally to me it closed actually there's three branches that could service me in exactly the same way but in different locations and not having a physical presence anymore so i think Although branches are closing, they are optimising their footprints, the pop-up branches theme and experience is starting to grow and grow and grow. And actually, if you look at the physical footprints now, especially from, again, a Barclays customer, there's one local to our office. in London I use it every now and then I'm between meetings in London because you go in there get free coffee have a conversation with somebody around your accounts get some small light advice and they're really focused on their open plan similar to the story that the building societies are looking now it's like they're focused Focus on the advice, focus on open plan, just getting people into the branch to have a conversation regardless of whether they're coming in for a certain reason. So, yeah, they are closing. But I think the optimization of those branches and the investment into the branches that remain is continuing to increase.

• Speaker #0

  OK, and if we consider building societies on the other hand, they are focusing on maintaining the physical network system. So why is it important?

• Speaker #1

  I think there's two aspects to look at this. So one is, so if we look at it from today's, from now, like I said earlier, the building society's current demographic of clients are on the older age, and they want those in-branch experience. They want to come into branch and have a conversation, even if it's just as simple as making a payment. And that's for a couple of reasons. One is, it's just what they're used to. It's just their traditional way of banking. Their digital adoption is generally lower. A lot of them don't have smartphones, so they can't necessarily go online. or go through the mobile application to make those transactions. And also they just want a level of confidence, especially if you look at fraud within the UK. It's that demographic you get targeted by fraudsters. So by them going into branch and going, I need to make a large payment to somebody fixing my roof or somebody cleaning the flat or something along those lines, actually just going into a branch and talking to a branch member about it just gives them that level of confidence and go, branch can now do. their checks against the person you're sending your your payment to so it catches a lot of fraud as well so i think those are the three things why they they still use branches so especially from a building society perspective they need that physical footprint to service the current customer base they have if they follow the similar sort of trend right now with the current customer base that they've got a member base they'll just alienate a lot of their customers and won't be able to serve their customers and start losing some of those customers so that's a really important thing. Secondly, again... still looking at why they're retaining them now is as i mentioned right at the start of the conversation building societies are seen as part of the community they're there for the good of their community they've reinvested profits back into community causes like charities having a physical footprint within the community is an important thing to to maintain that message so that's why they say look that's why we maintain the physical presence even if they see the the use of them dropping actually maintaining that physical presence to foster the thinking around them being part of the community and also foster relationships and personalize experience experience that they currently have with their customers that is really important that they maintain and actually we've seen a lot of our customers increase the number of branches that they've got so that's really the now and then if we look at the future so yes building societies recognize that that older demographic won't be around forever they will start they have general generational wealth transfer from those older customers all the way to their grandchildren or children and if they can't provide a service that meets their AIDS than then they'll then lose that wealth, and that wealth will transfer to another financial service provider. So it's just about, again, it's getting that balance right. But the last thing building societies want to go and do is try and compete with the likes of Monzo, your Revolut, your Starlins, because if they just try and compete with them on technology solutions, then that's just not their wheelhouse, and they're just going to lose. They've got huge technology budgets. They're basically technology providers with a banking license. So they're never going to be able to compete with that level of mobile application in the market. market the thing the building society's got to hold on to is their competitive advantage that they have today and bring that into a digital space again those those advice driven services the personalized relationships that they have with their customers how do they transfer that and that experience they have with their customers today into a digital experience and that's where technology is like sort of capturing of data putting AI tools over the top of the data to really drive that personalization at scale for their customers so for example when a customer comes towards the end of their mortgage term. Actually, if the mobile application go, look, Ben, we understand your personal circumstances. These are the mortgages you've had previously. This is the income that we can see from your open banking records. This is sort of property prices that are happening within your local area. We think you should go for a three-year fixed term at this price because of X, Y, and Z. So I think it's bringing in those sort of things. And that's the level of advice they would get within a branch in an in-person interaction. So I think that's really important. to still maintain that. But actually, if we go back to the question around the physical footprint of branches, there's still the balance. So there's still going to be customers who go, look, I'm buying a house. I really need to actually have a conversation with somebody. Last thing I want to do is mess this up because I'm stuck with a three-year mortgage term that I can't move away from anymore. So there's always going to be that level of in-person engagement that's needed. on site is always they're never going to move away from not being part of their community they're not going to go full digital only players so they're still going to have to retain that that physical footprint okay circling back to the challenges you highlighted earlier can you share some examples

• Speaker #0

  examples of how you are supporting your customers in solving dues?

• Speaker #1

  Yeah, so I think there's five main challenges. So when I joined 18 months ago, one of the big things I wanted to do, especially from a product management perspective, is go and visit all of our customers and really understand what their challenges are today, but also they see the challenges over the next two, three, four, five years. And it really boiled down to five main problem areas. One was the rise of digital adoption and we've spoken about that already there is a transfer generational wealth transfer to the younger generation and they're really digital first customers secondly is build societies like we said they do find it difficult to compete with banks in the uk just because they have a larger presence and they're they're national and also they hold most of their clients wealth anyway from a current account perspective so really they've got to look at opportunities to diversify themselves third is scalable growth so if we look at building sites again they are traditional financial service providers in the UK, they are sort of very high touch, manual, paper-based providers. Now, obviously we need to support them in that journey to move to a more automated, streamlined back office operations, but still keep that personalised touch on the front end. So that's really important for them. Net interest margins are only getting tighter and tighter and tighter. And actually the only way to keep the same levels of profitability, even when you scale your customers and increase the revenue, is actually how do I reduce the total cost of ownership with my core technology platform? How do I increase the level of automation with my back office operations? So those are two key points. Fourth is, how do I drive value from my disparate data today? I think if you asked any financial service providers, actually any business within the world, and go how far down are you with your data journey, any AI journey, I think they'll all say, look, we're a million miles away from where we want to be. So I think it's, although building a society is a little bit behind the curve from that perspective. actually the whole industry is behind the curve because the speed is moving now so that's really a real focus for them and going how do i drive those personalized services at scale and we've touched on some of those things that that's really important for building societies but also how do i look at my back office operations and find efficiencies in that with the with the data and then the fifth one and i say this to our building societies customers all the time i think i think the the next based on all the stuff we've covered today the next five years are probably you're gonna be the biggie is shift that we've seen with the building society model that's coming from look there's new players entering the market all the time if you look at neo banks yes they're really focused on current accounts and debit cards to start with but actually now they're starting to diversify their offerings as well they've gone into investing spaces they've now got savings accounts they're trialing mortgages across europe now it's only gonna be a matter of time before they enter the uk market with those as well and then yeah political economic changes within the market house prices are going up and down all the time interest rates all over the place like there's there's huge amounts of change happening in the industry and it's really how do we build a society select a technology provider that can react the fastest to the market because the ones that don't react it's just going to fall far behind so those are the five challenges i think now sort of highlighting some of the things that we're doing in that space so if we look at the digital adoption piece one of the biggest investments that we've made in our release coming out the end of the month is our digital onboarding so having full end-to-end digital onboarding liveness it's checking and identity checking through the mobile application so given us put us on level par with the likes of all those neo banks and also the sort of high street banks in the uk is now it just takes me minutes to open an account i don't have to have a piece of paper sent to my address to prove that address to prove that it's me and then send it back and it takes me a week to open my account so that's really a big change that we're making to bring parity to our mobile applications to the other providers in the market. If we look at from a scalable growth opportunity for example we've already mentioned it but product switch is a big one again another significant investment from us is You can do fully automated mortgage product switch for your customer directly through the mobile application. So if their mortgage terms come into the end, we present them with a list of options that they can move to, they can just select it and within minutes our back office system can automate the end-to-end. process and move them onto the new mortgage at the end of their term. So that's again, from an automation standpoint, a lot of our customers do that manually today and go through it all paper-based to transfer mortgage products from one product to another product. So that's a huge investment for us. And then if we look from the speed of changes and reacting fast to the market, I think the big investment into our digital branch solution in the future, which is built on our new digital workbench platform, which is a SaaS-based platform, this just takes us to another place in terms of how quick we can react against our current product set. So those are some of the significant investments that we're making into our product set.

• Speaker #0

  I'm curious, looking forward... How do you see the role of building society member engagement evolving over the next five to 10 years?

• Speaker #1

  I'll caveat this a little bit because it's very difficult for anyone to predict five to 10 years in the future. But I think it's going to be the theme is going to be the important piece. I think the theme will run for the rest of time. Again, it's how do you balance the in-person relationships with the digital interactions? and I think every I think building society is going to struggle with that first because I think building society is not need to retain the human interactions because that's just who they are they are part of their community they have those personalized relationships with their customers but i do think the rest of the industry are going to struggle with that a little bit um too so now i've sort of caveated it i think two two themes that i see a lot on the back of that is one i think human style relationships at scale will dominate the industry going forward and the way i phrase that is key it's human style relationships so i think that If you look at digital channels in the future, people are going to expect exactly the same experience if they have an in-person relationship with a human or they have an in-person relationship with an AI agent through their banking application. So I should be able to have a proper conversation and get advice from them. So I go, look, I'm looking to buy a house, as we discussed earlier, this is my income, this is the house I'm looking at, this is the property details, and then start getting some feedback directly from them, like I'm having a conversation with them. And I think that is really where the industry is going to go. But I do think, especially as society starts to move more and more down the AI agent route, I think we're going to go way too far and everybody's going to go full AI agent interactions. And then I think it's going to start to scale back a little bit because I think people are then going to go, actually spending time with a human is going to be really like, I don't get it anymore. And I think that aspect will start to come back. And again, I think this is where building societies can really focus on maintaining that that driving that promoting those in-person relationships and building that level of trust to catch that market as it starts to rebound when it goes too far into sort of the ai model so i think that is going to be one big trend i think that sort of building society is going to have to juggle with and then the second one is i think building societies will start to expand their advice driven services so i think look in five or ten years time any transactional financial interaction it's just going to be fully through through digital like i said making a payment making changes to my account maybe making a product switch any transactional relation any transactional um style interactions with the financial services provider is going to go full digital so that's where i think building societies then go like how do i how do i maintain that level of those services to my customers now more than moving away from what they they use their bank for so i think advice driven services for build societies expand it'll move away from just

• Speaker #0

  How do I set savings goals and work towards those savings goals? How do I buy a house or transfer a mortgage to a new product to go in full-blown holistic wealth management services? Getting people in and going, look, let's use open banking, let's use... integrations to multiple with your different financial providers but non-financial providers as well and get a 360 degree view holistic view of a client where advisors at building societies can then have those interactions on a more wealth holistic wealth management management perspective so that's that's the second trend i think it's their advice services will expand massively because that's really where those in-person human interactions will purely be focused on in the future i was wondering if you have any examples of the changes that you brought to building society yeah so we've touched on a little bit of them already around the digital engagement staff the product switch piece i think the the biggest investment that we're making is are into our new branch telesolutions. So this is going to revolutionise and change the game for how building societies have in-branch experiences. So like I said, we look at the two examples I gave around Scottish building society and Nottingham building society where they're moving to customer service centres and advice-driven experiences within branches. One of the big things holding them back from going full-blown optimisation of real advice spaces is the technology they use. they do have have older technology and it really promotes sort of behind the desk interactions with consumers because actually it's not really something you want to show to your customer and how dated the technology is in the interface so i think our the investment that we're making into that space is going to allow our building societies to enhance the sort of the experiences for customers within branch it's going to optimize their current processes within branch and not have to swivel chair between multiple systems anymore they can purely focus on the engagement with their customer and also if we go back to the conversation we're having around how banks have gone through an optimization process with their their branches to closing physical footprints but then obviously open up more pop-up branches i think the industry from a building society perspective needs to go on that journey as well not close physical branches but actually increase the number of pop-up branches in local communities and that could be through customer service centers or the examples i had from Barclays is like pop up in your local garden centre or even go out into individual homes so to get advisors on their tablets going into individuals homes the ones that need more level of advice and want that that really focused one-on-one interaction with the advisor again today the technology is just holding them back they can't do that so the investment into our new digital banking solution is going to enable them to really transition into that new model and like we said throughout the whole conversation is getting that balance between digital and human is going to be extremely important in the future especially as I said like I think the next five years we're going to shift too far away from in-person relationships and then starts to come back again so the solution we're developing is allows them to make that transition very very very quick so as soon as we've noticed a trend in the market or notice a new additional product or a new customer base that we want to service then we can just build that and just release it straight within the products and our customers can consume it on the fly so that's really our biggest investment over the next 18 months is going into that and helping our customers transition into the future space of going digital but staying human okay

• Speaker #1

  Thank you, Ben, for joining us and sharing your insights.

• Speaker #0

  No, I appreciate it. It was a good conversation. Thank you.