The banking environment remains challenging for new entrants, with profit margins squeezed and a US banking crisis seeing several regional banks collapse in the last couple of years. In the UK, Revolut faced heightened regulatory scrutiny over its financial crime controls, the Financial Times reported, while the FCA recently fined Starling Bank for failings in the same area.
Against this backdrop, it’s essential you have the right advice when starting a bank. Even a perfectly-executed banking application process can cost upwards of £15m. Get it wrong, and you could end up wasting time and money.
In this series of articles our expert panel delves deep into the process of becoming a bank, offering tips and insight to help you avoid costly pitfalls and build your financial institution the right way.
Our panellists are Ivan Frampton, Founder and MD at TriFidus; Eddie Trahearn, CFO at GB Bank; Vishwas Khanna, Partner at Avantage Reply; and David Bowles, an independent risk consultant.
In this first article, Frampton, Trahearn and Khanna explore key topics, including
questions to ask yourself before setting up as a bank
keeping it simple when it comes to products
importance of a lending strategy.
Do you need to be a bank?
Starting a bank is an enormous undertaking that requires more than just ambition or a great idea. This is a path strewn with regulatory hurdles and financial planning challenges. You also have the difficult task of recruiting the right people to help steer the ship. For these reasons, the first question to ask yourself is: do you even need to be a bank to achieve your strategic goals?
Before jumping into the process, pause and reflect on your motivations for wanting to start a bank. “Is it because of a desire to help clients, provide innovative financial products, potentially cheaper funding, or perhaps be a force for public good?” asks Khanna.
Some entrepreneurs and founders believe that running a bank would allow them to control deposits and help clients manage their finances better. While these are noble intentions, not all financial services require being a regulated entity.
Revolut is an excellent example. For years, it provided services like currency exchange and money transfers that people typically associate with banks, but it wasn't a bank in the UK until quite recently – it received a UK banking licence with restrictions in July 2024.
Trahearn agrees and suggests, ”Founders should ask themselves if it is possible to do what they want without being a bank.”
The regulatory bar for creating a bank is extremely high – and necessarily so. Regulators are risk averse and will make the process as robust as possible. Khanna puts it succinctly: “There is simply no upside for regulators in granting yet another banking license without an intrusive review process.”
Key takeaway: Going through a robust process of identifying your motivations and considering alternatives will deepen your response to regulators and build your credibility.
Focus or fail
The next step in the process should be to carefully define your business focus. “Many founders want to offer a wide range of services, but we recommend that in the initial stage they focus on a narrow proposition and are really clear about their business strategy,” says Khanna.
This resonates with all our contributors, who can share examples of new banks overcomplicating their product offering and then struggling to achieve profitability.
You can strategically add to your product offering once you have become a competent, capital generating, regulated business.
Key takeaway: Keep your deposits and lending product offering simple and prioritise profitability.
Remember to lend
As you focus and prioritise, remember to give careful thought to how you will generate income through lending.
“Banking isn’t just about managing other people’s deposits – you also need a clear desire and strategy for lending,” Frampton points out. "Investors and the regulator will want a sustainable and profitable financial plan that exceeds regulatory capital requirements."
Technology-focused businesses and those motivated to improve depositors’ experience may find this guidance especially valuable.
Key takeaway: Create a solid business plan capable of generating sustainable returns to exceed regulatory capital requirements.
Summary
Starting a bank means entering a world where regulators are sceptical. These authorities will want to know your business plan inside out. That includes everything from the type of customers you’ll serve and what you’re going to do with people’s deposits.
Before you dedicate yourself (and your capital) to this mission, you need to be clear on why you want to become a bank. Understand your motivations and ask yourself if there might be another, easier way.
Then create a simple lending strategy and product offering for the deposit funds you receive, which will help you build a sustainable business.
Our next article in this series will delve into the first critical challenge you are likely to face: securing the right people, at the right time.
If you need advice on setting up a bank, from your business plan to your financial model, TriFidus can help. Contact our specialists today.
All views expressed are personal and do not necessarily represent the views of interviewees’ organisations.