Merger of Nationwide with the Derbyshire and Cheshire

Commenting on the announced merger of Nationwide with the Derbyshire and Cheshire building societies, Kevin Mountford, head of savings at moneysupermarket.com, said: "Changes are afoot in the building society market, and consolidation will be on the cards as many societies face mounting pressures due to current market conditions.

"Fundamentally, building societies exist to help members to buy houses and save cash. Building societies generally don't rely on the same level of wholesale funding the way banks do, and instead look to their members to generate retail deposits. However, in today's market this is becoming increasingly expensive.

"Many building societies are regional and as such rely on a branch network. However, this market area is becoming more competitive and, by their own admission, a large number of building societies have an ageing population. If building societies are to fight back they must differentiate their proposition, increase their membership base by attracting younger customers, and develop a strong direct offering that allows expansion beyond the geographical boundaries of their heartland.

"Some building societies have already taken the bull by the horns and addressed these issues - for example Britannia and Nationwide both have a strong national presence. And some of the smaller building societies have been very creative to help keep the edge over their competitors; Newcastle Building Society has built up its white label savings capabilities and supports a number of the overseas savings providers, including Icesave.

"However, I suspect many building societies will feel the only way to protect their customer base is to merge. Consolidation is going to be a key trend for building societies over the next year or so."