News Analysis

Will sharing IT save UK building societies?

Building societies could compete more effectively with banks and other larger competitors by sharing IT services.

Chancellor of the exchequer Alistair Darling last week published the Reforming Financial Markets white paper, which set out the government's proposals for the financial system.

The government wants to explore a model similar to that in many European countries, where financial organisations share back-office functions. It plans to report its findings in the Pre-Budget Report.

Ralph Silva, analyst at TowerGroup, says the proposals could be the saviour of UK building societies.

Building societies traditionally compete by providing good levels of service. But when the economy is struggling, customers just want best price. "When times are good people buy for service levels but when they buy on price, building societies go out of business," he says.

Building societies cannot compete with high street banks on price because banks have economies of scale. But sharing IT can cut costs and help them compete on price when times are bad, he says.

"Technology such as core banking systems do not offer competitive advantages to building societies. But technologies that support their services, such as CRM, do."

The Building Society Association says there is no legal barrier to societies sharing back-office facilities. There are several examples of such arrangements working well.

"It seems very unlikely, though, that we will see shared services on the scale of those on the continent, where mutuals operate on federal lines rather than as wholly independent entities," the Building Society Association says.

Skipton Building Society's Mutual One arm has offered IT bureau services for 15 years. Some 17 building societies use its audit services and more than 20 are working together on compliance.

"We are very supportive of collective action in principle as this, after all, is the whole raison d'etre of Mutual One," says a Skipton spokesperson.

"It makes a lot of sense for building societies to take a fresh look at their current cost base and consider how adopting a shared operating model like this might help them raise standards and gain access to valuable additional knowledge, skills and expertise - as well as achieving the kind of cost savings and economies of scale which the government is seeking in the current environment to strengthen the mutual model."

Loughborough Building Society is one of Skipton's Mutual One customers. "Outsourcing to another building society offered comfort in terms of shared priorities and a belief that the supplier fully understood our business," it says.

Newcastle Building Society also provides IT services to other financial services companies.

The society recently increased the capacity of its Strategic Solutions business, which provides computer systems and services.

Bradford & Bingley is among the Newcastle's customers for technology, processing capability and administrative support services.

Shared IT services like these can offer any business economies of scale and savings. The building society sector looks set to use the idea increasingly to compete in the tough times ahead.


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