How to become a bank (2016)

https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/new-bank/seminar-slides-1010.pdf?la=en&hash=CC03BF5728A8DD96D28AE26DEFB3E95BF1F03333

by hestefisk • 8 years ago

268 57 8 years ago

bankofengland.co.uk

simonvc2• 8 years ago

The UK regulators have done amazing work making it possible to start new "challenger" banks. We started 3 and a half years ago, so this kind of guide would have been super useful for us at the beginning.

It was a bit more opaque back when we did it, before us only a handful of new banks had been created since Metro bank, and that was the first in 125 years..

cpach• 8 years ago

Cool! May I ask what bank you are referring to? :)

pjc502• 8 years ago

Googling suggests Monzo: https://monzo.com/blog/authors/simon-vans-colina/

tpurves• 8 years ago

How does the regulatory environment in NA (USA/Canada) compare vs UK when it comes to starting a challenger bank?

otoburb• 8 years ago

Canadian banking is a protected industry. It is fiendishly difficult to set up a new bank due to Canada's proximity to the United States and the fear that larger international banks will (eventually) swallow up the Canadian banking system.

US banking is slightly easier, in the sense that one may be able to either go through the tortuous process of setting up your own bank, or buying a corporation with the requisite licenses and (ideally) existing customer base.

EDIT: Rogers Communications (a Canadian telecommunications provider) applied for a banking license in September 2011 and launched in 2013[1]. I believe the bar is somewhat lower for existing domestic/Canadian companies.

[1] https://en.wikipedia.org/wiki/Rogers_Bank

HoyaSaxa• 8 years ago

It is very unlikely that you would be granted a banking charter in the United States for a 'challenger' bank model. The FDIC (and other regulators) have started to approve some de novo (new) banks[1], but these are very much the run of the mill community banks that are not looking to disrupt.

The regulators in the U.S. will finally give in, but we're more likely to see a 'challenger' bank as a spin out of an existing bank over the next few years IMO.

N26 and other UK/European challenger banks are entering the U.S. market this summer, but they will not have a banking license.

[1] https://www.americanbanker.com/slideshow/rebirth-the-de-novo...

rb808• 8 years ago

How does it feel though when any competitor can also create a new bank easily?

tixocloud7• 8 years ago

Creation of new banks is only just the beginning. It takes a good while to ramp up on trust. When you consider the enormous customer bases and monetary volumes of large banks, you will see that there is enough of the pie for everyone to be successful.

tixocloud7• 8 years ago

What you guys are doing is quite interesting and it’s made my job all the more interesting.

I do wish I could do the same as what you’ve done and disrupt the Canadian banking system.

The UK banking system seems incredibly more efficient and fair to consumers than the Canadian banking system does.

osrec4• 8 years ago

Just wondering, how has it made your job more interesting?

moltar3• 8 years ago

Lets do it!

- fellow Canadian annoyed by our banking system

chr15p• 8 years ago

before us only a handful of new banks had been created since Metro bank, and that was the first in 125 years..

I think thats the point of this push by the Bank Of England. UK high street banking was dominated by a handful of huge, old, banks that had to be bailed out during the 2008 banking crisis because pretty much the entire population used them. A larger number of smaller banks reduces the moral hazard around "too big to fail" banks, allows management who cause a bank failure to lose their jobs, their share options, and their company, and reduces the chances of the government having to nearly bankrupt itself to bail them out.

Plus if London wants to continue to be a world centre of finance then encouraging innovative new banks to base there cant exactly do any harm.

neilwilson• 8 years ago

A government in its own currency can never go bankrupt.

The bailing out procedure should become a prepackaged administration process via the central bank. Banks should know if they exhaust their capital buffers the bank will be placed into administration and refloated by the central bank. ALL equity holders in the bank will make a total loss.

That then sets expectations correctly.

pjc502• 8 years ago

After Northern Rock, it seems fairly reasonable that companies starting a banking operation be decently equity-funded and organised. Liquidity requirements for all banks were raised by European financial regulators after the crisis. There's even a "mobilization" phase where a new bank is allowed to run with looser compliance for 12 months while they get started.

"To authorise a bank we must consider it resolvable (in bankruptcy)" is also a sensible bit of planning: you're not allowed to dump a toxic collapse on the central bank and run away.

The bit about "calling yourself a bank" reminds me of https://en.wikipedia.org/wiki/Banknotes_of_the_Black_Sheep_C...

Sniperfish• 8 years ago

Very interesting content and I hadn't encountered it before, but can we get a (2016) tag as it's not 'new'.

uhnuhnuhn• 8 years ago

This seems to be a great balance between helping new banks get off the ground while keeping a tight oversight regime in place. For an interesting example of what happens when you deregulate your banking sector too much: I remember doing research on the Ukranian banking sector about 10 years ago, there were over 900 banks in operation. Many of them seemed to be oligarchs setting up banks and leveraging their capital to lend their own/their friend's corporation a ton of money. The borrower would then simply default on the loan and the bank would go bankrupt...

TazeTSchnitzel• 8 years ago

I suppose https://en.wikipedia.org/wiki/Albanian_Civil_War would be the extreme worst case?

ChrisSD• 8 years ago

I do wonder about some of the new digital banks. For example, Atom Bank PLC requires all banking be done via smartphone. I'd not be comfortable doing banking on my smartphone but even if I was their Terms and Conditions make me nervous[0].

It's the usual stuff about the customer being responsible for everything and they can change the terms at any time without option to accept or reject them. But beyond that it also appears to say that you're responsible for using a smartphone that supports their app. Given they can drop support for a device at any time, this has the potential to lock you out until you get a new phone.

I'm also not sure about their use of biometrics for security. I wouldn't use an ordinary front facing camera to unlock my phone so why would I use it to secure my bank account?

[0] https://www.atombank.co.uk/application-terms-and-conditions

21• 8 years ago

You should see the Revolut (they are applying to become a bank) terms.

Mind-boggling stuff like you being responsible for their bugs:

24.14. To the extent permitted by applicable law, Revolut is not liable, and you agree not to hold it responsible, for any damages or losses (including, but not limited to, loss of money, goodwill, or reputation, profits, or other intangible losses or any special, indirect, or consequential damages) resulting directly or indirectly from:
glitches, bugs, errors, or inaccuracies of any kind in the Revolut Services;
17.2. If for any reason (including, but not limited to, any technical errors on our behalf or on behalf of our third-party providers) you have a negative balance in your Revolut Electronic Money Account, you agree to immediately Top-Up the required amount to correct the negative balance, such amounts being due without the need for previous notification. If you fail to do so:

Banks are notorious for their terms, but this is taking it to a new level. Move fast, break things, and don't be responsible.

To be fair, I'm not sure how enforceable these clauses are, I find it hard to believe that a judge would side with them if a customer's money suddenly vanish.

alexbilbie• 8 years ago

The FCA are very consumer conscious - look at the threats of significant fines towards TSB for just a few days of their app and website being offline.

robinson-wall2• 8 years ago

It doesn’t have to be this way - e.g. https://monzo.com/terms/

Disclaimer: I work for Monzo

PeterisP2• 8 years ago

The terms are quite interesting, but the key part there is "To the extent permitted by applicable law". In EU (and UK, where Revolut is based) consumer rights in general and also for financial services are mainly set in law (which is being pushed in consumers favor with various acts e.g. the payment services directives). The terms of all financial institutions pretty much reflect the minimum required by law, so the actual terms are essentially the same for everyone - if they're worse than the law, then they're null and void; and if they're better than the law... well, that doesn't happen.

pbhjpbhj• 8 years ago

There was the Bank of Dave, an interesting experiment a few years back in the UK; I read the book, I think they made a documentary movie too.

ryanmarsh• 8 years ago

Does such a guide exist for the US?

An investor in a startup I was working for made his way onto the board of a local (small town) bank. He was already very wealthy from real-estate. He was quite proud of himself for making it onto the board of that small bank. It seemed odd to me because he was already so wealthy, he didn't really need to be on that tiny bank board.

I asked him about what it took to get onto the board, how one starts a bank and so forth. I'll never forget what he said: "Owning property is a right, owning a bank is a privilege".

In retrospect that does seem to be in line with how one gets into banking (as an owner) in the United States.

venantius3• 8 years ago

We're about to start the process of getting authorized as a bank in the UK (we want to be a digital-only bank that handles client money for companies like Coinbase, PayPal, etc).

The Bank of England and the FCA's resources on how to go through the process have been invaluable. The founding team is American and we've literally relocated to the UK because of the friendlier regulatory environment in order to do this.

osrec4• 8 years ago

Nice. I'm looking to work with a company like yours in the near future. Are you guys based in London by any chance?

venantius3• 8 years ago

We are! Feel free to shoot me an email - david at griffin.sh if you want to find a time to connect.

tixocloud7• 8 years ago

I tried signing up for early access but seems like it’s not working?

venantius3• 8 years ago

Hmm, sorry about that. Feel free to shoot me an email (David at griffin.sh); would love to chat about your needs.

leonjohnson1• 8 years ago

This looks really cool and i'm glad someone is working on this. This is definitely a service I'll be keeping an eye for.

stephen_g• 8 years ago

Seen this before, but it's very cool. The sector in the UK seems a lot better than Australia - here you need a minimum of $50 million in Tier 1 capital (share capital and retained income) to even start the process to become an Authorised Deposit-taking Institution.

Sure, banking is a serious business, but I think it'd be beneficial to have a special category for small startup banks only requiring $5 to $10 million or so, with adequate supervision etc.

The problem we have though is that the culture of our banks is rotten to the core, and dominated by four main players. The regulators (ASIC and APRA) are underfunded and mainly turn a blind eye to a lot of what goes on (mainly going after smaller financial services companies who can't afford the same kind of lawyers as the banks). We're only finally having a proper enquiry now after investigative journalists having uncovered a lot of this years and years ago, and most people are pretty shocked at what's going on.

I think the sector could benefit from smaller players coming in (hopefully with better morals), but the regulatory requirements are helping to protect the big banks' strangleholds.

sanbor2• 8 years ago

Sorry if this is offtopic, but this was one of the aspects that I found very interesting about Bitcoin.

Because it's a protocol, in theory you just need to have the software installed in your computer and you can start being a bank.

This is similar to the web for publishing. You just need to plug your computer to the internet and start serving your website. Before this if you didn't have the time, energy and luck of finding a publisher it was hard to publish a book.

This is a huge simplification but I just wanted to highlight one interesting aspect of cryptocurrencies.

neffy• 8 years ago

There was a short period in the USA, known as the wildcat banking era in the 1840's, when it was indeed possible for anybody to setup a bank. There's quite an entertaining paper from the time that describes the resulting chaos:

http://www.jstor.org/stable/2338493

And yes, it pretty much describes the current crypto scene as well.

twic• 8 years ago

This is a terrific little read, thanks!

PeterisP2• 8 years ago

Bitcoin software on your computer allows you to start being a bank in the exact same manner that a table in a public place and an advertising banner is sufficient for being a physical bank.

You technically can provide banking services (the core one, of course, being moneylending) with that, and this has been traditionally done that way since literally biblical times, but nowadays that would be just as illegal as doing the same with Bitcoin.

sanbor2• 8 years ago

Right, we still have to deal with local laws anyway.

However, consider that technically I could create a "New PayPal" as I could receive digital payments and give cash to my customers. Of course this doesn't cover the legal aspect.

If you'd want to release something like PayPal in 1998, the only possibility is being rich or having rich friends. That's the only way credit card companies are going to consider doing business with you.

Now with Bitcoin you're relieved of that obstacle but of course you have to still deal with the law.

sjreese• 8 years ago

I agree the entry fee of $50,000 is 1/3 of the cost in the US - I hope a lot of start-ups will add banking services to their business models as such (cash -> bitcoin <-> cash and in any amount giving payments to 3rd world partners for goods and services) Thus the Belt&Road project would have one currency

paulcole• 8 years ago

From the headline I thought this was going to be one of my favorite stories:

"How I set out to simplify ordering Starbucks and created an internal banking system."

http://royrapoport.blogspot.com/2011/05/coffee-and-its-effec...

LeoPanthera• 8 years ago

I'm a British citizen but I live in the USA. I want to maintain an account in the UK - but this is becoming harder and harder. The mainstream banks want a balance of tens of thousands of pounds, often hundreds of thousands of pounds, before they'll allow it.

Currently I have an account with [large famous bank] who think I'm still living in the UK. If they ever find out I'm not, the terms of my account say they're allowed to close it.

So this is one thing I'd love to see from "new" banks - services for people who are UK citizens but do not reside in the UK.

commandlinefan• 8 years ago

I thought about this when Bank of America stopped offering loans to gun manufacturers who sell assault-style weapons to civilians - my first thought was, well, there's a market opportunity for a "startup" bank.

How to become a bank (2016)

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