Jasmine Birtles
Your money-making expert. Financial journalist, TV and radio personality.
The Difference Between a Mutual and a Bank
Reading Time: 3 minutesWe’ve all heard of banks – but do you know what a mutual is? You probably already know about them, without realising it! Here, we cover the main differences between a mutual and a bank, and why you should consider using a mutual for some of your savings strategy.
- The History of Mutuals
- Mutual and a Bank: The Main Difference
- Why Use a Bank?
- Why Use a Mutual?
- More Money Saving Tips
The History of Mutuals
Mutual insurers are commonly known as ‘mutuals’ these days – and it’s not only insurers, either! You might know them as a building society or a friendly society.
Mutuals started before the welfare state was really a thing. They helped communities in a mutually-beneficial way to access things like financial support for healthcare, or to own their home. Every member would pay regularly into the mutual society, and was then able to access financial help when needed. Their money would also help other members of the mutual – so everyone benefitted.
We’ve got a more detailed article about mutuals here, if you want a more in-depth explanation!
Mutual and a Bank: The Main Difference
The main difference between a mutual and a bank is how customers are part of the organisation. A mutual’s customers are called members – because they all hold shares in the organisation. A bank has customers – but their customers may not be shareholders. Instead, shares can be bought by anyone on the stock market. That means people who don’t use the bank can have a say in how it is run – and also get profits from their shares in the form of dividends.
A mutual gives back to its members in the form of a bonus when profits are high. Usually, though, it reinvests the profits back into the organisation to further benefit members. They’ll offer extra benefits to members as part of this, such as discretionary grants to help their members in difficulty.
Mutuals also invest differently than banks. They operate With Profit policies – investing members’ savings for long-term growth rather than in higher risk stocks and shares. As such, according to the Association of Financial Mutuals, With Profit policies provide investment returns greater than an average unitised product with a similar structure.
Why Use a Bank?
Some mutuals only offer savings products, rather than current accounts, credit cards, or loans. So, you’ll need to use a bank to have access to these products.
A bank can also suit your day-to-day financial needs. A mutual is designed to offer long-term investment for its members, rather than immediate financial needs. So, for example, a bank account is suitable for you to have your salary paid into every month – and it provides you with a debit card for everyday spending.
You may also need a bank if you want to access larger loans or mortgages. Some mutuals do offer mortgages, but many are solely savings-focused.
Why Use a Mutual?
A mutual acts in the interest of its members, rather than shareholders. That means you have a say in how the organisation is run – and benefit from the profits, too (without having to invest in stocks and shares).
In addition, mutuals offer a range of savings options that are accessible for everybody. Unlike banks, which sometimes have minimum monthly pay-in requirements, a mutual encourages everyone to save what they can, when they can.
As a member, you’re entitled to access certain benefits like discretionary grants in times of need, too. This could be, for example, to pay for your child to have a laptop for home schooling. Banks don’t offer this kind of discretionary grant – they’d offer credit options (and even then, you’d need to have good credit to apply!).
Finally, mutuals can offer an extra tax-efficient option outside of your ISA allowance (if you’ve used it up). It’s called a Tax Exempt Savings Plan and you can save up to £25 a month in it, on top of your ISA allowance – meaning you can save an extra £300 tax-free a year!
A combined approach
As you can see, a mutual and a bank are different from each other – but it’s worth considering holding accounts with both. Banks are great for day-to-day banking and spending, while mutuals offer you different benefits as well as long-term savings growth.
Our latest eBook: Why Do I Need to Save? – which will help you understand how to save every month, even if you think it’s impossible on your budget! Download it for free here.
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