If you feel opening a bank today is near to impossible, it is not that much a hard task. Although banking is a difficult industry to join, it is achievable with lots of groundwork and planning. If you have decided to walk on this journey, let us help you by guiding through the foundation steps.
Starting a Bank – Know the Basics
Starting your own bank needs careful application process. If you are a United States citizen, banking is heavily regulated. Every new charter application is screened and thoroughly scrutinized by the government. Most ill-prepared applicants are turned down without any hesitation. Each applicant is assigned a senior officer who is in charge of dissecting the applicant’s business plan through a strict review process and detects any loopholes and early problems.
When you start the business, your investment will be watched over by the regulators strictly. Security will be built and everything, from your financial forecasts, the board of directors’ background and history, projections, fingerprinting, banking policy statements, signatures of notaries to the business plan, will be crosschecked. Other than visions of profits, you have to bring something to the table that adds value to the community. Your main purpose and mission should be serving the community. You have to think how you are going to do it while ensuring to differentiate yourself from your competitors.
Most banks are chartered institutions that are regulated and governed by Central Bank Regulation. However, if you decide to start a finance company, instead of a bank, you will be governed by legislative Acts. Based on your country’s jurisdiction, you will be required to submit different items to start a bank. However, the most common ones include (for US) Bills of Exchange, Cheques Act, Companies Act, Consumer Guarantees Act, Electronic Transaction Act, Fair Trading Act, Property Law Acts, Reserve Bank Act, Fair Trading Act, Credit Contracts and Consumer Finance Acts and Securities Act.
Step 1: Getting Yourself Started
It takes three to six months to start your own bank. The process includes organizing and preparing legal documents, recording and filing the applications. First, you need to appoint a board of directors serving six to thirteen professionals. The board will be responsible for overseeing the strategic plans of the bank and making sure the federal laws and company policies are adhered by each and every member of the bank.
Make sure that some of the board members have previous experience in the banking sector or any other established financial institution. Financial strategy is one of the key elements that decide the success of a bank. Your board members should be stringent players in the finance department. Make sure you hire a lawyer for all the legal works to be carried.
Step 2: Generate the Cost to Open a Bank
The cost to open a bank in the United States can fall anywhere between $5,00,000 to 1 million. A group of bankers will pass an FBI bank check where you will have to present to show in papers that you have around $12 million in capital to run the bank.
If you wish to start an off-shore bank, the start-up capital required is $1 million and the overall cost would be between $1,50,000 to $2,50,000.
Assembling that much of capital money is a big question. You can ask your board members if they might be willing to invest. Or you can source capital fund from private equity funds, founders groups, a bank holding company, special funding for community banks, or get support from financial institutions.
Step 3: Things You Need to Start a Bank
You need to submit the following, with respect to your board of directors:
- Full name, date of birth, permanent address, and occupation.
- Passport or driving license or any other identity proof.
- If there is no identity proof, then get a Notarised copy of your birth certificate. You will also be required to submit a passport size photo of yours, a signature of an identifier behind the photo, along with date and name. You have to submit a letter signed by the identifier, along with his permanent address, and date and place of birth.
- Two references, one from the bank and one from your personal circle. This can be waived if an agent verifies your bona fides in writing.
- Name and address of your attorney or legal solicitor
- Any other additional requirement drawn-out by the jurisdiction.
Hire a legal team to help you with the arduous amount of legal proceedings and regulations. Make sure you have legally covered all the bases before moving forward.
Step 4: Develop a Risk Management Infrastructure
You have to establish a risk management setting before you open the bank. This infrastructure will help you recognize, measure, analyze, monitor, and control the risks involved in banking products and lines. Some of the notable risks involved in banking business are credit, liquidity, operational, legal, reputational, market and other fluctuations in the economy.
To keep everything in place and manage risks, you need to stay abreast with policies and procedures.
Step 5: Apply for the Charters
Once you have analyzed the risks and taken suitable measures to mitigate them, you have to apply for all the charters, both federal and state legal charters. The state can issue the state charter and the office of the controller of the currency grants the federal charter. The federal deposit insurance corporation must approve the deposit insurance for your bank.
Following this, you must consider hiring a community reinvestment specialist to talk on behalf of your bank to the public. The specialist, a public figure with commendable knowledge of banking rules and regulation, will represent your bank when it is called to show how it is contributing to the community. He will respond to all bank related concerns and present report on banking and investment ways.
Step 6: Find Your Banking Space
Once you have gotten your bank approved and completed the first few steps, it is time to give your bank a physical structure. Your bank should be set in a location where there is a lot of ongoing traffic, and where there are markets and residential properties. Do not choose a place where there is competition.
Your bank should be spacious enough to occupy at least four banking offices, a seating area, a teller area, a place for internal and external ATM, a vault (that is probably located far into the bank), and a security station. Canteen, dining area, restrooms will take additional space.
You could buy, rent, or lease out the commercial space for your bank. Since banking is a long-term business, it is recommended that you either buy or lease the property.
Step 7: Establish Banking Services
What will your bank offer? To establish your services, we suggest that you do an analysis of your community and its demographics. An ordinary community-based bank generally offers the following services:
- Checking account
- Savings account
- Salary account
- Mortgage loans
- Small business loans
- RDs, CDs, and FDs
- Investment and Planning
- Debit Card
If you want to serve more and be looked upon as an industrial bank, you could consider adding the following:
- Commercial loans
- Housing loans
- Private loans
- Credit cards
- International banking
- Commercial DDAs
- Personal Banking apps
- Internet banking facilities etc.
As protection against worst events, always have 20% of your overall money secured held in reserve.
Your offered services should revolve around only one aspect: investing in the community. If you want to grow your money, spend the money. You have to know when your customers should take risks in investment and when they should not. The risk in banking is always a crucial factor, but it is also part of the normalcy.
Step 7: Hire Suitable Employees
You cannot run a bank all alone. You need good and smart employees, probably from the banking division. Having competent bankers with strong financial and banking background will act as pilot to a flying plane. They will not only help take the business off the ground but also provide the necessary sustenance, reputation, and brand value a bank require during the initial phase.
Competent professionals with exclusive banking knowledge give customers the necessary confidence when handing over their money to the bank. Hire tellers with excellent communication and people pleasing skills. You want customers to return to your bank and the only way to do so is improving communication and speeding service and process time.
Step 8: Provide Online Banking Option
As of today, no one prefers to stand in a queue and talk to the teller unless if it is something big, like a house or commercial loans. For rest of the things, we have online banking, phone banking, and app banking. You have to for sure set up an online banking system and make things breezy for your customers.
Always keep yourself ready with an elevator pitch. Elevator pitch is a widely used sales tip, which is a 30-second pitch that easily rolls off your tongue when someone asks what you do. It is a convincing dialogue that is almost recited and delivered with gusto.
We hope our post really helps you in setting up your banking business. If you the reading inspiring enough, take a few minutes out and visit our website. We have other interesting stuff going on there.