View from City Road: High street is uphill for building societies

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It is hard to believe that a decade ago building societies were seen in some quarters as a mortal threat to the high street clearing banks. In the event, banks made and are still making big inroads into the mortgage market while the societies' moves into money transmission through cheque accounts and plastic cards have been limited.

The costs of diversification have been higher than expected, which has slowed the process. Banks have won the time to fight back with more competitive interest rates and with their own innovations, such as Midland's Firstdirect, which has sparked a whole series of new telephone banking projects elsewhere.

As full service banks finally tackle the problem of their huge costs with heavy redundancies and branch closures, it is the building societies that will come under increasing pressure. The most obvious problem is that there are too many of them.

Building society costs are low compared with banks, but that is partly because most offer a simple service. Even Abbey National, which became a bank, is a narrow specialist compared with Midland and Lloyds, despite its bigger balance sheet.

Indeed, the example of Abbey confirms the importance of size of balance sheet as well as low costs, since the long-term trend towards higher funding from the money markets gives a substantial advantage to a big borrower with a blue chip rating. This is why it is hard to argue with the logic of the merger between National & Provincial and Leeds Permanent.

These are two societies that stuck to their lasts, by concentrating on mortgages and associated insurance, avoiding too deep an involvement in expensive money transmission. But in both markets, the competitive threat from banks is intensifying.

The question, as always with mergers of mutual societies, is whether the promised efficiency gains will be realised in the absence of genuine shareholder pressure. The potential for messing up the integration of systems is serious - remember the Nationwide Anglia merger? - and there are also unanswered questions about how the two societies' insurance business will be handled.

Shareholder complaints are usually dealt with by the promise of a special dividend, but the figures do not justify this for N&P and Leeds. There is, however, a longer-term case for a much stronger - and statutory - presence for customers on the board of mutual societies, and for an obligation on societies to fund shareholders' committees, which would be empowered to hire their own advisers to examine mergers.