Banks come in all shapes and sizes. Your banking structure will depend on your understanding of why becoming a bank is the next sensible step in your strategic plan.

Clients typically come to us with a very structured and clear view of what they need in terms of licensing. However, we often consult with clients that think they require a specific solution when, in reality, they need another one.

A family office, for instance, could be thinking about issuing shares for a fund or a similar investment vehicle. In reality, in some cases, those family offices actually need a way to securitize assets. In such scenarios, having an investment bank to underwrite everything makes much more sense than individually launching funds.

The prerequisites will vary broadly. However, you should expect the following three checkboxes to be a “must” everywhere.

1. Capitalization

2. Banking Background

3. Solid Business Plan

Capitalization is, simply put, the availability of capital in the form of cash to guarantee the operation of the bank and the appropriate margin of error when deploying your business plan. Having money in liquid form is a prerequisite that must be demonstrated when one is licensing a bank. How much depends on the jurisdiction and the size of the deployment you are planning.

How to Start a Bank
Prospective licensees seeking bank licenses without the required capital will often find that their licenses are denied. This will give them trouble during their next evaluations with the same authority. In this regard, anyone that wants to obtain a banking license should clearly understand that they need capital to move forward with any type of application.

We sometimes hear from prospective bankers that have extensive and complex plans to circumvent the capital requirements. We have seen creative ways to meet the capitalization prerequisite without real liquid capital backing it up. Prospective bankers must understand that to act as a bank, by definition, they need capital. After years of experience, we have found that there are no real alternatives to liquidity. Without capital you cannot license a bank and you are likely harming your efforts for future applications.

The second requirement is often banking experience or a background in the banking industry. This is one of the main pillars during both licensing and the operation of the bank. It is often the single most important factor when one presents an application. The individual running or directing a financial business often determines that business’s chances of success. In banking, the role of the individuals within the management structure is carefully scrutinized, as having the wrong people on board could create a risk of failure or, worse, fraud.

When licensing a bank, the board within the regulator will evaluate the underlying experience and exposure of everyone involved in that prospective license. The board will look into specifics regarding previous directive involvement within the banking industry. It will also determine whether you have experienced economic debacles or challenges in the past. Having extensive experience in the industry will certainly pay off.

The regulator will carefully review the curricular histories of all applicants, so having the right people inside the bank applying for the license is a key factor in obtaining licensing. You want to have the best human resources possible, especially when those human resources will be handling third parties’ money.

The qualifications and experience of the management team should be reviewed carefully. The structure of the various boards of directors is also key. One of the most important factors when submitting an application is to carefully consider the interaction between members of the board and the proposed directive team. Individuals behind any potential license must have the right qualifications. If they don’t, you will not be approved. To avoid pitfalls, special attention should be paid to these interactions during the preparation of your license application. For your bank to be licensed, each member of the senior management team must be prepared to have an interview with the regulator and to show that he/she has extensive experience in banking. The regulator is often more interested in finding out whether the people behind the wheel are qualified in real-life scenarios and not just on paper. All submissions will be verified. Most importantly, regulators will carefully evaluate the individuals involved and their subsequent interaction on the bank’s proposed business plan.
A business plan is also one of the three main prerequisites. Preparing a bank for licensing requires a well-crafted business strategy based on target markets.

Any license application will require a carefully drafted strategic business plan. This plan must consider the seamless integration of the proposed business into the domestic market and should be detailed in nature. It should include everything related to operations, financial planning, and procedures. It should also include management resources and abilities for assessment.

Generally, an annex should be included, describing implications and possible impacts within the domestic economy.

Is it hard to set up a bank?

In numerous articles, whitepapers, and posts we have explored the factors that influence authorities to grant or deny licenses to prospective banks or financial institutions. After a significant amount of experience, we have concluded that most financial regulators are reluctant to issue new licenses because, by adding a new player into the system, they are creating inherent risks. New players pose additional risks because new licenses are often more vulnerable than their well-established older counterparts. This is the undesirable result of authorizing or issuing a license to a new financial entity.

Furthermore, because all tasks are tailored to each specific license holder, incorporating new players requires adaptation costs that require an allocation of time and resources from the regulator. The regulator could provide various reasons why you are not being allowed into the system. In most cases, even when you comply with all initial and subsequent requirements, if licensing new entities is not a part of the regulator’s fiscal period planning, your chances of being issued a license are slim.

However, careful planning and understanding of the not-so-clear mechanics of the licensing procedure may boost your chances of success.

WHY TO LICENSE A BANK:

We’ve found that the number-one reason why entities seek to establish new banks involves current limitations, both in terms of regulations and specific to one’s current licensing structure.  Usually, we find that entities from various industries grow to a point where being their own bank is the sensible alternative to banking with the options that the market is currently providing. As a result of their volume and potential profits, evolving to a bank makes more sense in the long run.

Every month, thousands of credits, payment transactions, and payroll-related operations could be carried out internally using a tailored system created specifically for those entities’ needs, and at a much lower price.

How to Start a Bank

A good indicator of this is when a party has such a close relationship to its bank that part of the bank infrastructure is installed within the client’s physical location, or when specific customized solutions are deployed within the client’s network. Usually, in these cases it is advisable to review the costs and see if it makes more sense for the company to become its own banker.

License limitations naturally arise due to growth. Financial institutions that are successful and experiencing a growing trend often reach their licensing capacity and generally find themselves creatively structuring products that could clearly benefit from another license type. This is when clients routinely find themselves rejecting important business opportunities because of such limitations.

Being limited by licensing boundaries is costly and could prove to be much more expensive if activity within the institutions falls outside the legal authorizations under which those clients can operate. In other words, being licensed incorrectly could be risky and expensive.

A thorough evaluation must be conducted by both the management and the legal team. Institutions will probably require an upgraded license to deliver the specific services that they are currently restricted from providing. In licensing, it’s always almost better to be over-licensed than to be restricted by your licensing boundaries.

For everyone else, becoming a licensed institution will give you an edge in your niche. You have probably already identified the benefits of becoming a licensed bank. Here at Financial Licensing Advisors, we have extensive experience with clients requiring the same specific services stemming from growth. We are here to help you. We are the world leader in financial licensing services and we will tailor unique solutions based on your specific needs. Shortly, you will be on way to converting your company into a fully licensed bank.