How to Start a Bank

Posted on
Old school bank made of stone

Estimated reading time: 11 minutes

If you want to learn how to start your own bank because it sounds like easy money (who doesn’t have a bank account/checking account these days?), think again. There’s a reason there are only about 20 applications to start banks in the U.S. each year. Starting a bank requires a lot of work and a lot of money. It’s also a long process, taking up to a year and a half.

But if you can get past all of this, starting your own bank, is a very safe investment with decent returns. They’re also some of the longest standing institutions in the world with banks like Citibank and Chase Bank being well over 100 years old! 

In this blog post, we’ll walk you step-by step through the process of how to start a bank, so you can go forth with confidence!

Why Should You Start a Bank?

The U.S. is the only industrialized nation in the world where financial institutions can be started by a group of citizens, and plenty of people have over the years. This use to mean starting small banks — brick and mortar buildings. But in recent years, there’s been an emergence of financial technology (Fintech) companies coming out with new tech to automate and speed up the loan application process.

As a result, you have banks that are 100% online, offering financial services to a broader range of people. As a result, banks like Chime and Varo (which have no brick and mortar counterpart), conduct all transactions via online banking. By doing this, has allowed these banks to do away with overdraft fees and and service fees on checking accounts and savings accounts.

This change from a central bank to the decentralization of the banking industry has sparked a title wave of tech savvy entrepreneurs launching online banks with much success. You could be one of them!

How to Start a Bank: Step by Step

People want to know how to own a bank for various reasons. Sometimes, bank startup entrepreneurs want to target customers in a particular local community that’s underserved by existing financial. Common examples of this include Chinese-Americans and Latinos starting a community bank to better serve immigrants from their country. 

Others decide to learn how to open a bank because they have lending expertise in a specific industry that gives them an edge. Whatever the reason for you deciding to start your business, the steps below will help get you there.

1. Create a Business Plan

The first step in organizing a new bank is to build a strong business plan. The plan must consider the proposed business of the new bank, its financial and managerial resources and prospects for success, the convenience and needs of the public, and the effect on competition.

A strong business plan is one that is supported by detailed financial projections and appropriate policies and procedures. This forms the basis of successful regulatory applications for a bank charter. It underpins the expressed intentions of the bank in raising organization capital. And it guides the activities of the bank for several years following the opening of the institution.

If done correctly, your business plan will act as a management tool, identifying potential challenges, and providing you with strategies for growth. Your business plan should include the following:

  • -Mission, Vision & Objections of the venture
  • -The Company (its legal description, history, and current situation/location)
  • -Products & Services (offered and planned)
  • -External Environment (the industry status, the economy, legal/regulatory)
  • -Overall Market (including analysis of the competition, size, growth, demographics, etc.)
  • -Target Market (the specific customer segments your firm has or plans on pursuing)
  • -Analysis of Strengths, Weaknesses, Opportunities, and Threats/Risks
  • -Sales & Marketing Strategy (including promotion, pricing, distribution, forecasts)
  • -Management Team & Advisors (one of the most crucial areas for influencing funding)
  • -Operational Plan (including equipment, labor/personnel, and production/service process)
  • -Implementation Plan
  • -Financials & Exit/Payback Strategy (to show how investors/lenders will get their return)

The business plan experts at Inc Authority will handle the writing, editing, research, analysis and projections, giving you all the essential elements of a business plan. And don’t worry about revisions, we’ll take care of those too! Click here to learn more and get started!

2. Form a Board of Directors

Another key factor in understanding how to start a bank is forming a board of directors. Bank founders need to put together a board of directors to oversee management, and then they have to go out and raise enough capital to fund the bank’s operations. To be approved for a new bank charter, the senior management team must be comprised of experienced bankers with a history of relevant success.

Your board of directors should include people with successful careers in a mix of business, banking, and other fields, and who have representation in the disciplines needed for the board to meet its responsibilities.

The role of the board should not be taken lightly. This is because regulators and other investors will look to the investment of the directors and senior officers as an important sign of their commitment to the bank.

3. Apply to the Government Regulators

Government regulators oversee banks. Often times, bank founders may opt to apply to a state agency for a charter, or they may go to the federal Office of the Comptroller of the Currency. Once a bank is chartered, it has to obtain insurance from the Federal Deposit Insurance Commission (FDIC), though by this point in the process that’s usually a given.

This is the longest process, but once a startup bank gets through this regulatory process, though, things usually work out pretty well.

4. Apply for a Bank Charter

As mentioned before, starting a bank is a long process involving an in-depth organization process and permission from several regulatory authorities. Extensive information about the organizers, the business plan, senior management team, finances, capital adequacy, risk management infrastructure, and other factors must be provided to the appropriate authorities.

The proposed bank must first receive approval for a federal or state banking charter. Before granting a charter, the chartering regulator must determine that the applicant bank has a reasonable chance for success and will operate in a safe and sound manner.

Next, the proposed bank must obtain approval for deposit insurance from the Federal Deposit Insurance Corporation. Additional approvals are required from the Federal Reserve if, at formation, a holding company would control the new bank or a state-chartered bank would become a member of the Federal Reserve.

5. Raising Capital

Once successful in the regulatory process, new banks are required to raise initial capital from investors before they can open. 

To do this correctly, all insured banks must demonstrate that it will have enough capital to support its risk profile, operations, and future growth even in the event of unexpected losses.

Newly established banks are often subject to additional criteria that remain in place until the bank’s operations become well established and profitable.

Business owners should aim for a minimum capital of $15 million to $25 million. Raising this kind of capital is often the result of a well formulated and executed business plan. There was a bank in New York that raised $130 million dollars.

Every successful small business starts with entity formation. This is the only way to ensure the liability and asset protection as well as take advantage of numerous tax benefits.

There are main business structures to choose from, LLCs  and corporations. Let’s take a closer look at both.

LLC

An LLC is a limited liability company that does exactly that… it limits the liability of the owners/shareholders from the debts of the business. It also protects business owners from lawsuits against the business. 

By blending the aspects of corporations, partnerships and sole proprietorships into a simple and flexible business entity, LLCs shield owners and operators from personal liability (similar to a corporation) and have the “pass-through” tax benefits of a partnership.

Additionally, LLCs offer the same personal liability protection as corporations, but do not require the typical formalities that are required when managing a corporation.

Corporation

Like an LLC, a corporation is a legal entity created separately from those who own and operate it. A corporation’s debts and taxes are separate from its owners, thereby offering the greatest personal liability protection of all business structures.

The two most common types of corporations are S and C corporations. We will assist you in choosing which type of corporation is right for you and help you complete the appropriate paperwork for your filing.

C Corp

On average, C corporations pay less in tax than an individual. It’s also the only tax table where the tax rate drops when you start making millions. That’s why every Fortune 500 company is a C corporation.

Additionally, there are no limitations on shareholders. That means they can live anywhere in the world and be of any entity. Even better, C corps boast fewer criteria than S corps giving you the options you need to meet your objectives.

The main disadvantage of this structure is that it pays tax on its earnings and the shareholders’ dividends. This means a double tax on your corporation’s earnings.

S Corp

From tax advantages to flexibility, forming an S corp has many benefits. One such benefit is pass-through taxation. This allows owners to avoid the double tax of C corps making it a popular choice for small business owners.

Both S and C corps allow for limited liability of the owners, officers, and directors but while C corps have no limitations on shareholders, S corps cap the number of shareholders at 75. There are also more qualifications your company must meet to elect S corp status.

We here at Inc Authority specialize in forming LLCs and corporations and can get you started in a few simple steps. Did we mention that our LLC setup service is 100% free?

7. Obtaining a Banking License

You’ll need to submit an application for a new banking license after your company is formed. Inc Authority will handle all the relevant startup and registration procedures, speeding up this process.

Aside from the initial costs for the setup and our services, requirements vary greatly depending on the prospective jurisdiction. Here are the most common requirements for starting a bank:

  • A minimum of two partners and a solid management team with an impeccable track record and without a history of bankruptcy, money laundering, fraud, or related issues.
  • Senior directive staff with extensive banking experience plus general experience in the financial sector. Over 10 years of experience is required but 20+ is most desirable.
  • Appointment of a compliance officer and a risk management officer, among other key individuals.
  • Setup of a local office in the jurisdictions where you are applying.
  • Directive staff with relevant experience (typically have an MBA or similar qualification from an international renowned institution).
  • All directors and shareholders will be required by law to submit to a full background check and audit conducted by an external auditing firm.
  • An initial business plan submitted with the application.
  • Initial paid-up capital requirement 1
  • Extensive experience among all first- and second-level managers and directors.
  • Reporting backend banking software implementation.

8. Choose a Location and Market Your Business

According to ABA, two-thirds of Americans are using online and mobile banking as their primary banking channels. As a result, foot traffic is decreasing in traditional brick and mortar banks. This isn’t to say you shouldn’t have a brick and mortar location, but it’s something to keep in mind.

Once you’ve chosen the perfect location (online or brick and mortar), you will need to come up with a marketing plan to ensure people find you! Here are some ways to do that:

Create a Website

This step is a no brainer. These days every company needs a website to connect with customers and conduct transactions. But not just any website will do. You see, it needs to be a professionally-built, and SEO optimized to get you seen in a crowded marketplace. 

Social Media Marketing

Social media is the #1 tool at a small business owners disposal to get the word out about their business. It’s also cheaper than traditional marketing.

Google Ads

Google Ads is a robust and powerful tool for promoting your services. With the right targeting, advertising for your bank can allow you to reach a whole new crop of potential customers.

Content Marketing

The content on your website is one of the best marketing methods that when properly utilized can brings new visitors to your website.

Email Marketing

Like content marketing, email marketing remains a useful marketing tool, with 73% of companies rating it as ‘excellent’ to ‘good’ in terms of ROI. This is because email marketing allows you measure the results of your messaging. As a result, you can capitalize off what messaging is working and rework what isn’t.

With Inc Authority’s Website and Marketing package, you’ll enjoy a private consultation with a custom Website Designer who will work with you to develop a responsive website design, including SEO optimized content and website directory listings. 

You’ll also receive a professionally designed logo, business cards, social media setup and much more! 

In Conclusion

Now that you know how to start a bank, it’s time to start your free LLC with Inc Authority today! You’ll get your LLC in minutes as well as 9 FREE business management tools to help you run your startup.