How to Start a Bank

Although not one of the most common entrepreneurial endeavors, opening a new bank is totally possible, and more people should consider it. In fact, many independently owned community banks are some of the most successful small businesses in their respective areas. While it won’t be easy, an ambitious entrepreneur with the right acumen and the ability to acquire the necessary starting capital should be able to start a successful new bank in their community.

In this post, we’ll cover the characteristics that make an entrepreneur eligible to start a bank and then run through each step in the process. 

Is opening a bank right for you?

Not many people have the right professional background and academic qualifications to open a new bank. However, if the following traits apply to you, you might be the person for the job.

You have years of banking experience.

It should be a given that at least half a decade of experience in the banking industry is a prerequisite before attempting to open a new bank. 

You have an education in finance.

Banking is extremely complicated, and those without a degree in finance may find themselves over the heads. If you don’t have a background in finance, partner up with someone that does.

You can acquire the starting capital.

As a rule of thumb, it takes a lot of money to start a bank. Generally, $15 to $20 million dollars in capital is necessary, which is a lot of money to be able to raise. Those that don’t see that goal as realistic should consider another business opportunity. 

Opening a bank step-by-step

1. Write a business plan and decide which type of bank to open

Drafting a comprehensive business plan with detailed financial projections for up to five years is essential for attracting starting capital and applying for legal charters. Your business summary should describe the type of bank you wish to open and the services you expect to provide.  

2. Choose which banking services to offer

The financial services offered by your bank will vary according to the needs of the local community in which you open, as well as the habits of your target market. Community banks typically offer the following services:

• Savings accounts
• Checking accounts
• Small business loans
• Mortgage loans
• Credit cards
• Debit cards
• Online banking 

Alternately, bigger banks geared toward industrial clients usually provide the following services:

• Commercial DDAs
• Wealth management 
• Investment consultation
• Commercial loans
• Broker/dealer services 

3. Establish a board of directors

The next step is to hire a team of eight to twelve people as the bank’s board of directors. The board will be tasked with the following responsibilities: 

• Strategizing the bank’s long term plan 
• Ensuring that a bank complies with federal and state regulations
• Signing off on major investments
• Regulating the behavior of employees and making sure they follow company policies 

4. Select a location

Once the details of your bank’s strategy and financial projections have been worked out, you can choose a location in which to open the bank. Analyze the local market to determine a location that: 

• Sees plenty of local traffic 
• Is accessible from nearby commercial and residential areas
• Is not too close to competing banks. 

5. Acquire funding, choose a business entity, register your business, and obtain federal and state tax ID numbers

Refer to our How to Start a Business Guide for instructions on how to complete these essential steps.

6. Obtain legal charters and a banking license

In order to operate, your bank must apply for federal and state legal charters. Federal charters are granted by the Office of the Comptroller of the Currency, whereas state charters are obtained from the state government.

Obtaining a bank license from the federal reserve, FDIC, or state agencies is also a requirement.  

7. Buy insurance coverage

Insurance coverage is an essential means of protection for any business, and especially for banks, which hold on to a lot of other people’s money and are vulnerable to robbery. In fact, banks with employees are required by the federal government to have two types of insurance, while others are strongly encouraged, or required at the state level. 

Here are the forms of insurance you should consider:

Required forms of insurance for all business with employees:

• Workers’ compensation: Covers medical costs and disability benefits if an employee is injured or becomes ill on the job.
• Unemployment insurance: Provides benefits to workers after a loss of job through no personal fault.

Necessary forms of insurance for banks:

• Deposit Insurance – Provided by the Federal Deposit Insurance Corporation (FDIC), deposit insurance protects funds that customers deposit in their savings and checking accounts. Even during a financial crisis, deposit accounts are fully protected by FDIC insurance and the United States government. 
• Professional liability insurance: Covers losses as a result of property damage, medical expenses, libel, slander, and negligence claims. 
• Commercial property insurance: Covers property damage to business-owned properties and possessions as a result of fire, theft, or storm.
• Disability insurance: Provides short-term benefits for employees suffering an illness or injury. Required in certain states such as California, New York, and Hawaii.

8. Install risk management infrastructure

Before the bank can open, a risk management team should be hired to assess and prevent credit, operational, liquidity, legal, and other risks faced by a bank. An excellent risk management team will protect a bank’s assets and keep employees educated about potential fraud and unwise financial decisions. 

9. Purchase or lease equipment

Next, its time to buy or lease all the essential equipment that a bank needs to operate. Here’s a list of the most important equipment:

• Safes and vault doors
• Modular vaults
• ATMs
• Drive-up teller systems
• Night depositories
• Electronic locks
• Cameras and security equipment
• Alarm systems

10. Hire employees

Your bank’s employees will be the public face of the operation, so make sure to hire the best management team, bank tellers, lenders, and financial consultants that you can find. 

11. Develop relationships with local businesses

As a new bank, it’s important to reach out to local business owners and elected officials in order to foster long-lasting relationships. This will help your bank develop a reputation in the community and open up local investment opportunities.  

12. Make local investments

Along similar lines, investing in local businesses and charitable causes will allow your bank to make a name for itself in the local community and help draw in customers from the surrounding area. 

13. Create an online banking option

These days, even local banks have online banking services. In fact, it’s a necessity. Hire a company to develop your bank’s online banking system so that your customers can check their account balances, make transfers, pay bills, and perform other functions from their personal computers. 

14. Market your bank 

Good investments and local word-of-mouth help, but no bank can truly become a success without local advertisements and a well-established web presence. Here are the key steps for promoting your bank online and around town:

• Create a website. Register a domain name for a company website (You can use domain.com, Bluehost, GoDaddy.com, or Namecheap.com). Hire a web designer to develop the website (or do it yourself). Be sure to include detailed contact information on the site.
• Open social media accounts. Register accounts on the popular social media services (Twitter, Facebook, Instagram)
• Register a Google profile. This will allow you to add pictures of your business, respond to positive customer reviews, and address customer concerns.
• Respond to online customer feedback. Register accounts on business review platforms such as Yelp and TripAdvisor. This will allow you to write thank-you notes in response to glowing reviews and address negative reviews.
• Take out ads on billboards and in local publications. It still pays to increase visibility by buying ads in local newspapers and on highway billboards.