How to Start a New Bank: Navigating the UK Financial Services Landscape
The retail banking landscape in the U.K. has changed dramatically in recent years and it continues to evolve. We have seen the arrival of challenger banks – new, often digital entities focused on customer service and experience – as well as institutions with a narrow focus that take one element of finance (such as P2P lending) and do it well.
In some ways, it is easier than ever to start a bank. Two developments are having a positive impact: British finance minister George Osbourne's recent vow to increase retail banking competition by issuing 15 new banking licenses in the next five years and the U.K. Competition and Markets Authority (CMA) investigation into the retail banking services available to small and medium enterprises and consumers. If you then match this with the amount of growth happening in the fintech sector, in mobile banking in particular, we have an optimistic outlook of U.K. banking and the opportunities for challenger banks.
However, there are many factors to consider for those brave enough to bring a new bank to life:
- Current state of the market, including a decline of cash low adoption rates for current account switch service (Cass)
- Key challenges, such as the license application and banking regulations
- Incumbents vs. challengers: Collaboration or competition?
- Technology innovation: Best to build internally or partner with a third party?
Learn About the Process
The application process for setting up a new bank is certainly easier than it has been, but that's not to say it's now easy to obtain a banking license. New entrants need to know how to overcome this potential obstacle. In addition to regulatory advancements in pre-application support, there is now a significant array of well-versed advisory firms in the application process – firms that have learned from those that have gone before and whose expertise can be readily accessed. There are intrinsic and strategic advantages to starting a bank now, including advances in technology.
Address Financing and Legal Requirements
When starting a new bank, it's important to consider both how you set up relationships with your financing partners and the legal and management structures of the bank. A lot of time can be spent addressing how the bank will be financed, which is often done by participating in multiple funding rounds and other sources of investments. Other issues that need to be managed and led by the bank's founders include dealing with the regulatory requirements, as well as understanding the tax environment.
Put the Customer First
Customer mobility is an important issue for new banks. Start-up banks must understand that customers are often unwilling to leave behind existing banking relationships. Switching levels are at only 2 percent for personal current accounts and 4 percent for business current accounts. With this in mind, the focus must be on customer service, putting the customer at the heart of everything you do, and fostering a culture of constant innovation, according to several of the speakers at this summer's How to Start a Bank seminar, including Victoria Raffé, former director of administrative registration at the FCA, Anthony Thomson, founder of Metro Bank and Atom Bank, and Ricky Knox, founder and CEO of Project OpenBank.
Tap Into the Community
New entrants expect to work alongside traditional institutions and to utilise those institutions' existing infrastructures. They also expect to be part of the traditional institutional makeup, not in complete opposition to it. There is also a community to be found among new entrants; to foster growth, they should work together in some respects, as opposed to being in competition.
Understand the Importance of Technology
New banks need top-class technology to differentiate themselves and meet the needs of their customers, especially as many will look at adopting a digital front, middle and back office, as well as digital distribution for most banking functions. All banks – existing and new – also need to consider emerging technology, such as blockchain technology and APIs, and how to work with them.
There has never been a better time to start a new bank in the U.K. By taking the right steps when entering the market – either with new technology or as a new entrant – there is real opportunity for success in this market.