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Is there a point to building societies if they’re all buying banks?

When Thomas Mason Daffern set up a building society 140 years ago this year, his vision was clear. The accountant wanted to help local people save for the future and borrow money to buy their own homes.
Now, the Coventry Building Society is poised to embark on a dramatic divergence from his original plan by taking over the Co-operative Bank and offering current accounts and business banking services. That £780 million transformational deal is being cemented just as another building society — the Nationwide — is also on the verge of buying a bank, Virgin Money.
The two big transactions have heightened the profile of building societies in the financial sector and raised a key question about whether building societies are really any different to the mainstream banks they are now buying.
To Steve Hughes, the Welshman who orchestrated the Co-op deal, the difference, and clear strength of building societies, is in their very make-up. For building societies are “mutual”, that is to say, mutually owned by, and run for the benefit of, their members. Banks, on the other hand, are owned by shareholders.
The chief executive of the Coventry — or “the Cov” as he dubbed it in his strong Swansea accent — rattled off four reasons why its two million members think mutuality is best.
“They believe that we can deliver better value because we don’t have shareholders. They believe we’ll offer them the service of their choice rather than forcing them in a channel they don’t want to use, [such as digital banking]. They believe that we keep their data and their money safe. And they say we’d love you to make a difference to my family, my community, et cetera,” said Hughes, 52, in his first interview since the Co-op takeover plan was announced in May.
To hammer home his message, Hughes pointed out that Coventry lists all its rivals’ savings rates alongside its own on its website, to show the Cov is providing good value. “You’ve got to be pretty confident in the value you’re providing,” he said. Also on the site, it publishes every day how long customers have waited for their calls to be answered. Yesterday, it was showing 46 seconds for savings inquiries and 26 seconds for mortgages.
Research by John Cronin, an independent analyst at Seapoint Insights, has indicated that building societies offer better rates than banks. He studied the so-called net interest margin, the difference between what they pay savers and what they pay borrowers. Coventry’s was 1.05 per cent, compared with 2.90 at Lloyds — although it is a slightly crude measure as the lending profiles are different.
The Co-op deal is a big test for Hughes, who joined the Coventry from Wales’s Principality Building Society just as the Covid lockdowns were starting in March 2020. When the deal completes in the first quarter of next year, Coventry will have five million customers and become Britain’s seventh-largest financial services provider behind — in rank order — Lloyds, NatWest, Barclays, HSBC, Nationwide and Spanish-owned Santander.
It will also bring the Co-op Bank back into the mutual fold after a decade of ownership by the hedge funds that rescued it after a £1.5 billion black hole was uncovered in 2013 amid the so-called Crystal Methodist drugs scandal around its then-chairman Paul Flowers, a Methodist minister. Until then, the bank had been owned by the mutual Co-operative Group.
Much could still go wrong. Integrating financial services firms is notoriously difficult as IT systems are often extremely hard to meld together. Any glitches could hamper customer service and dent profits, eroding the Coventry’s ability to pay better interest rates. Last year it said its savings rates were 0.8 percentage points higher than the average and last week it was still in the “best buy “ savings tables compiled by Moneyfacts.
But, settling into his office in the society’s sprawling campus on the outskirts of Coventry, Hughes insisted he was confident about the “power of the combination”.
“I’ve got a phrase for the combined ‘Cov-Co-operative Bank’. I call it ‘C squared’ because it’s not about being additive. This is about building something that can be a multiplier and can be really powerful and a real challenger,” he said.
One element where mutuals are becoming less differentiated from their conventional big bank rivals is in executive pay. Hughes was paid £1 million last year, while Debbie Crosbie, his opposite number at the Nationwide, could receive £4.8 million if her long-term bonus pays out. For Hughes, it is a sign of where he has got to in his career, which started in the car industry studying accountancy at night school.
There has been speculation that the Co-op name will go — and that a new name could be given to the overall group, but he was not so sure. “You’ve got the Coventry brand, which is one of the best-kept secrets in the UK … awareness across the UK is relatively low. You’ve got the Co-operative Bank brand where the brand awareness is very, very strong,” he said.
He could, he said, have a “dual brand strategy”, or he could decide to have an “overarching parent brand architecture” as well. They were, he said, “exciting decisions” to be made.
Such calls will be made without the glare he would be subjected to if he were running a stock market-listed company, which would have to set public targets for cost savings and revenue growth over three years. Hughes has not made any targets public and talks about a time scale of “several years”.
Nor have members been given a say in a formal vote on the Co-op deal, although Hughes insisted that the society’s board, chaired by the banking veteran David Thorburn, would hold him to account.
Coventry’s profits have fallen to £159 million in the six months to the end of June from a record £269 million a year earlier, when lenders enjoyed a boost from higher Bank of England interest rates.
One of the questions levelled at building societies is whether they can afford to plough the millions of pounds into their computer systems needed to keep pace with their big-bank rivals. Some, such as Cronin, argue it is challenging. “Societies don’t have the capital or the retained earnings to plough into technological investments.”
Hughes countered that Coventry had spent £350 million since he arrived on investment, while also spending £33 million on refurbishing its 64 branches.
There is also another way Coventry differentiates itself from many banking rivals: the approach to working from home for almost 3,000 staff. While Santander has just started asking staff to spend three days a week in the office, up from two, Hughes said most of his non-branch staff came in two days a week, while those in call centre, three or four. “The ethos is to do whatever you need to do to do the job”, he said.
Hughes embraces hybrid working himself. The son of a former Port Talbot steel worker, Hughes generally works two days a week at his home, close to where he grew up in Swansea, and three days in Coventry or other locations. On those three office days, he gets an Airbnb in nearby Leamington Spa, where he sometimes works in the local branch on Fridays.
As the interview drew to a close, he insisted that, while Coventry was buying a bank, it had no intention of becoming one. “We are absolutely clear that remaining a mutual is the right long-term decision for our members. If anything, we want to bring that mutual ownership and member status to Co-op bank customers over time.”
It is hard to imagine what Thomas Mason Daffern would have made of it.

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