Starting a Bank – Regulatory Changes Attract New Market Entrants

– Lessons in reducing time and cost to market for challenger banks –

Establishing a licensed bank has long proved a complex endeavour, full of unfamiliar processes with undefined outcomes. That’s why we’ve only seen a handful of new banks launch successfully in the last 100 years. However as new regulations, an increased focus on competition and innovation in infrastructure models bed-in that is starting to change…

As part of its efforts to increase competition in the sector, the FCA has reduced some of the complexity upfront for new entrants – now promising a six-month licence application for new banks. Having lived through the former 18-month application process with Metro Bank, it’s great to see a positive change.

It has had the desired effect too; there are already 20 licenses for new UK banks in the offering. But that’s just the start; the challenge now is to enable that same speed in terms of infrastructure, operations and systems for a successful launch.

Unsurprisingly, every step to launch echoes with the seductive calls of consultants, lawyers and accountants eager to “help”.  All are expensive, few have actually done it and fewer still have the complete roadmap.Whilst external help of some kind is necessary, all too often neither the true cost nor the true capability of the provider is clear at the outset.  Choices often prove to be ill advised and the rework alone can blow already tight cost and time budgets.

Having helped guide a range of successful start-ups in the recent past – we’re the firm behind MetroBank’s renowned retail service and CCB’s ground-breaking business banking – we’ve retained the knowledge not just of what worked, but why we dismissed the alternatives.

This encompasses all aspects of the start-up journey, from business case and the associated financial and legal/regulatory requirements, through preferred strategy and operating model, to the enablers such as IT and HR.

In that, we’ve learned that by far the biggest costs incurred in the start-up process are Technology, Legal, Rework and HR. The key is containing each of them with no loss of quality or speed. Here’s how:

Technology – Cloud makes Sense

Andrew Hall

The licence application requires appropriate IT to be in place ahead of commencement.  But it makes little sense to allocate large sums of scarce capital to IT ahead of the revenue streams, let alone go through the pain of integrating, testing and trying to get it compliant before you know how big or how quickly your business will grow.

Recent successful start-up banks have sourced a fully compliant and fully scalable IT option, meaning IT costs are always directly proportional to your business.    This is particularly relevant where the IT costs have decreased significantly over the past few years with the ability to leverage public cloud, private cloud, dedicated tin and hybrid enterprise solutions. The provider should offer the flexibility to choose the right blend of infrastructure best meets your organisation’s needs.

Legal – Cut to the Chase

It is surprisingly easy to incur large bills for ticking the boxes, without getting close to practical outcomes. Our recommended approach here is seasoned by direct experience of what the regulator actually needs, which means not boiling the ocean trying to cover all bases; cut swiftly to the chase.  This in turn means moving the licence along as fast as possible and reducing time to launch.

Rework – Avoid Unpicking

Few applications go smoothly or get it right first time. Combining the right external experience, pre-compliant IT and approach means you’ll be less likely to have to unpick.  A core part of the licencing process is the ability to articulate the IT systems, processes and controls, and the proposed costs need to be worked into the business plan from the outset. Retrofitting the compliance or applications at a later date builds cost, so architecting that solution and exploiting a knowledgebase of where to find the right applications at the earliest stage is key. Sourcing a compliant-ready partner, that’s always updating its IT to meet updated or new regulation, also means a large portion of future work can be avoided.

HR – Know What you Need and When

Having a sound CIO and IT infrastructure architecture is important to the whole process, but it’s also well accepted that having the IT resources and the skilled staff available at an early stage is pretty expensive. This is why our challenger bank clients are increasingly opting for a CIO `proxy’ during the early part of the process. The business will likely require its own CIO by the time of the final licence application, though the cost of resourcing a full-serviced IT team or compliance specialist in-house tends to wait, with the use of ‘ virtual team’ services proving compelling.

Clearly, gaining a licence is only the first step, albeit a potentially arduous one. After that it is all about delivery of the promise, with innovation in service and/or products being key. For instance, we enable MetroBank’s unique, instant, on-site card production and the “branch in a box” that lets them roll out a new store at whatever pace their expansion plans dictates.

As Metro Bank shows, starting on the right foot – one of cost-effectiveness and business agility – is a cornerstone to future delivery and innovation.  Another is being realistic and flexible in approach, and making sure all those you work with are too. Your desired outcomes will likely be different from the challenger banks before you, so be sure you strike a suitable balance between precedent and preference, and between experience and innovation. You’ll need to lean on every single one!

Andrew Hall, niu Solutions – www.niu-solutions.com

Since January this year Andrew Hall has been running niu Solutions’ new Banking and Financial Services Division. With a track record of bringing new “challenger banks” to market, he is focussed on how new market entrants can prosper by using IT to create competitive business advantage.