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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.
Who is this business right for?
Owning a bank is a demanding endeavor. It requires intimate knowledge of the banking industry and regulatory structure of the financial services industry. A banker needs to be good under stress, love working with numbers, and also working odd hours. While employees clock out at the end of the day, a bank owner may need to take his or her work home with them.
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 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.
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, like RBC Royal Bank and Steams Bank, 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 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 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 steps to start a bank?
Once you're ready to start your bank, follow these steps to ensure that your business is legally compliant and avoid wasting time and money as your business grows:
- Plan your business. A clear plan is essential for success as an entrepreneur. A few important topics to consider are your initial costs, your target market, and how long it will take you to break even.
- Form a legal entity. Establishing a legal business entity prevents you from being personally liable if your bank is sued.
- Register for taxes. You will need to register for a variety of state and federal taxes before you can open for business.
- Open a business bank account. A dedicated checking account for your bank keeps your finances organized and makes your business appear more professional to your customers.
- Set up business accounting. Recording your various expenses and sources of income is critical to understanding the financial performance of your business. Keeping accurate and detailed accounts also greatly simplifies your annual tax filing.
- Obtain necessary permits and licenses. Failure to acquire necessary permits and licenses can result in hefty fines, or even cause your business to be shut down.
- Get business insurance. Insurance is highly recommended for all business owners. If you hire employees, workers compensation insurance may be a legal requirement in your state.
- Define your brand. Your brand is what your company stands for, as well as how your business is perceived by the public. A strong brand will help your business stand out from competitors.
- Establish a web presence. A business website allows customers to learn more about your company and the products or services you offer. You can also use social media to attract new clients or customers. Save 15% when you create a business website with Weebly.
Select your state below for an in-depth guide on completing each of these steps in your home state.
Where can I find a business mentor?
One of the greatest resources an entrepreneur can have is quality mentorship. As you start planning your business, connect with a free business resource near you to get the help you need.
Having a support network in place to turn to during tough times is a major factor of success for new business owners.
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 to promote & market a bank
Marketing your bank is difficult. Regulation controls most aspects of what you're allowed to say and do. You could start by advertising in local newspapers and on local T.V. networks. Tell others in the community about your plans to start a bank. Send out direct mail pieces and fliers to invite people to your grand opening.
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How to keep customers coming back
Offer competitive banking products and services. The banking industry is filled with uncompetitive or mediocre banks. Consumers demand lower fees and better customer service and aren't getting it from many of conventional, established, banks.
Find ways to innovate, lower fees and other costs, and make your banking services simple to understand and use.
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.
Federal Business Licensing Requirements
Banks must be approved for federal deposit insurance. Information on requirements and how to get approved can be found on the Federal Deposit Insurance Corporation website.
State & Local Business Licensing Requirements
Certain state permits and licenses may be needed to operate a bank. Learn more about licensing requirements in your state by visiting SBA’s reference to state licenses and permits.
Most businesses are required to collect sales tax on the goods or services they provide. To learn more about how sales tax will affect your business, read our article, Sales Tax for Small Businesses.
For information about local licenses and permits:
- Check with your town, city or county clerk’s office
- Get assistance from one of the local associations listed in US Small Business Associations directory of local business resources.
Maintain Personal Asset Protection
Don’t think that just forming an LLC, or any other type of business, will save your personal assets in case of a lawsuit or other matter by itself.
When your personal and business accounts are mixed, your personal assets (your home, car, and other valuables) are at risk in the event your LLC is sued. In business law, this is referred to as piercing your corporate veil.
Two of the simplest steps that will protect your business, and yourself, are to:
Open a business bank account
- This separates your personal assets from your company's assets, which is necessary for personal asset protection.
- It also makes accounting and tax filing easier.
Get a business credit card
- This helps you separate personal and business expenses by putting your business' expenses all in one place.
- It also builds your company's credit history, which can be useful to raise money and investment later on.
Certificate of Occupancy
A bank is generally run out of a building or storefront. Businesses operating out of a physical location typically require a Certificate of Occupancy (CO). A CO confirms that all building codes, zoning laws and government regulations have been met.
- If you plan to lease a location:
- It is generally the landlord’s responsibility to obtain a CO.
- Before leasing, confirm that your landlord has or can obtain a valid CO that is applicable to a bank.
- After a major renovation, a new CO often needs to be issued. If your place of business will be renovated before opening, it is recommended to include language in your lease agreement stating that lease payments will not commence until a valid CO is issued.
- If you plan to purchase or build a location:
- You will be responsible for obtaining a valid CO from a local government authority.
- Review all building codes and zoning requirements for your business’ location to ensure your bank will be in compliance and able to obtain a CO.
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.
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.
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.