How to Start a Bank

Part 1 - How to start a Bank business - Background

Banks take in deposits from depositors and then lend that money out to other people and businesses. Banks provide a vital function in the economy. Namely, liquidity. They allow individuals and businesses to pay for goods and services, investments, and assets that they otherwise would not be able to afford.

Our guide is in 3 parts:

• Part 1 - How to start a Bank business - Background
• Part 2 - Our planner tool to see if this idea is the right fit for you
• Part 3 - Action plan to get started

What are the costs involved in opening a bank?

The costs are significant since the banking industry is the most regulated industry in the country. Banks generally need between $12 to $20 million in starting capital. If you start a local community bank, you might be able to raise that money locally. Otherwise, you may have to solicit investors.

Once the capital is raised, you must apply to regulatory agencies. Regulators are strict in their review of applications since the financial crisis. Once you’re approved, you may open up your bank.

What are the ongoing expenses for a bank?

Ongoing expenses vary. However, in general, expenses are 15% of non-interest expenses, with a median expense across the country of about $400,000 per branch.

Who is the target market?

Preferred customers are both individuals and businesses.

How does a bank make money?

Banks make money by taking in deposits and lending them out to other people or businesses. A bank’s primary cost is the infrastructure they build, including buildings and labor costs. However, the basic function of a bank is simple. The bank must invest its money in such a way that they earn more than what it costs them to keep money on deposit.

For example, a bank may accept deposits from the general public and pay them 0.05% on savings accounts. They can then lend this money out to others at market rates. The difference between the 0.05% and the market rate is the interest “spread.” This is the bank’s profit.

Banks also make money by charging fees and offering other banking services, like business checking accounts, bank certificates of deposit, and money market accounts. Some banks also sell insurance.

How much can you charge customers?

You can charge customers for opening and maintaining a checking or savings account. The type and amount of fees vary, as well as how they are charged. Some banks have minimum deposit levels, while others charge monthly service fees that range from $5 per month to $100 per year unless a minimum balance is kept in the account. Most banks charge fees for overdrafts. And then there are the service fees for printing account balances, doing wire transfers, and a performing a host of other services.

How much profit can a bank make?

Banks typically make between 10% and 15% net profit. Return on equity ranges between 7% and 10%. Some banks realize a strong return on equity in excess of 10%.

How can you make your business more profitable?

Consider setting up an expansive network of ATMs to bring in more income for the bank. Offer more services. Banks can do more than just bank, these days. Consider offering insurance and retirement accounts.

Day-to-Day and Growth

What happens during a typical day at a bank?

Day to day activities of a banker include making loans, taking in deposits, and servicing bank customers. As an owner, you are also responsible for making sure the bank complies with all regulatory requirements. Banks are under immense pressure to turn a profit, so this means spending a lot of time underwriting good credit risks and figuring out where to put the bank’s money so it will make a stable and reliable return.

What are some skills and experiences that will help you build a successful bank?

Bankers need to have good business sense and must be good with numbers. They are responsible for overseeing the profitability of the bank so having a degree in finance, business administration, accounting, or related field is helpful.

What is the growth potential for a bank?

Growth potential for a bank is huge. Banks can stay small or can operate as large commercial and investment banks. Some banks offer franchise opportunities, but you don’t have to buy into a franchise to grow into a large national or international bank.

What are some insider tips for jump starting a bank?

Hire someone with familiarity in starting a bank. This is a complex process which is controlled almost entirely by state and federal regulation. You must navigate a complex maze of regulatory rules and paperwork. And, the risks are high as regulators may deny your application to become a bank.

One idea for raising the capital (and support) you need is to start a small community bank first. Gain local support and funds from your community. This will show regulators you’re a valuable member of the community you intend to serve.

How and when to build a team

Starting a bank usually requires a large staff. Plan on at least 10 employees for a small bank. Most banks have more than 20 employees working for them.

Part 2 - Is a Bank business the right fit for you?

Part 3 - Action plan to launch your Bank business in 90 days