Can You Really Start Your Own Bank or Credit Union?

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I don’t ever go to my bank’s actual location unless something drastic happens. I suspect this is true for many people today. With the advent of online banking systems, we do almost every financial thing with our mobile banking apps.

Which begs the question. Why have physical locations at all?

Of course, a bank is more than a money depository. You have to consider mortgages and other forms of banking. But for most transactions, a physical location is not necessary.

Enter the virtual bank. The first virtual bank came into existence in 1995. It wasn’t very successful during its three years, but it proved that a virtual bank was possible.

Today, virtual banks abound. And it’s entirely possible to create your own. Let’s look at how that’s possible as an entrepreneur.

1. Why Are Virtual Banks So Great?

The best part of virtual banks is convenience. You don’t have to drive to a physical location to talk to your bank or open an account. You merely get online.

And these banks are open 24/7 unless the bank is running website maintenance. And if you need to get ahold of a rep, most places also run a 24 hr customer service.

Better Rates

Infrastructure and overhead are a massive part of any business. But online businesses need fewer employees and less office space (if any). So, traditional banks are at a major disadvantage to virtual banks.

Virtual banks can offer perks other banks can’t. They can pass on the savings they make when eschewing expensive office space to the customer.

This means higher interest rates on savings accounts. They can also charge lower rates on mortgages and other loans. And they can allow accounts with no minimum balance.

Online Banking Services are Better

Because a virtual bank is entirely online, their product is essentially their online presence. Thus, unlike traditional banks, their online functions will be broad. And customers can do more remotely with a virtual bank than with a traditional one.

Virtual banks will often include investment analysis tools, financial planning tools, equity trading platforms and more. They will even offer free tax preparation and tax forms. A virtual bank essentially becomes your one-stop money shop.

2. It’s Possible to Start a Bank, but You’d Better be Flush

Banks aren’t just depositories for money. There is no Scrooge McDuck swimming in piles of gold at your local branch.

Banks are borrowing institutions. You give them your money and they lend it out at a higher interest rate than they give you. At any one time, if you had, say, one million dollars in a savings account, that money would not actually be in the bank.

During the Wall Street Crash of 1929, people learned the hard way that their money wasn’t just sitting in the bank. People panicked and tried to pull money out, money that just wasn’t there.

Today, the government backs a certain amount of your money. But it’s not much.

This is why it’s wise to invest in physical property you can later sell. You will at least have some of your assets outside of the bank and could sell if the bank fails.

But the bank’s schtick is exactly why you might want to consider getting into the banking business if you have enough capital lying about.

People need someplace to store their money and because of the benefits stated above, virtual banks are becoming more popular. There is a market and a need for better and more convenient financial institutions. Why not take advantage if you can?

How Flush do You Need to Be?

The first question you need to ask is: where will I start my bank? A virtual bank can be anywhere, so you’ll want to choose the cheapest location.

In the United States, you’ll need at least $500k if not a million dollars to get started, but you will need to show that you can secure at least $10 million to convince the government that you’re worthy.

In essence, it’s extremely difficult to start a bank in the United States (the land of monopolies and over-regulation).

Offshore banks are a different story. You only need one million dollars in capital to create a bank in some countries outside the United States.

Why do you need so much money? Essentially, you’re showing depositors that you can make investments. If you didn’t have capital, you’re not going to be able to ensure the safety of the depositor’s money.

The Board of Directors

Even if you are starting an online-only bank, you want people by your side who have experience. A board of professional bankers will help you create a strategic plan, review policies, and make sure you comply with regulations.

This could be a group as small as five trusted individuals or thirteen people.

Have a Plan

Not only will regulators want to see that you can succeed, your investors will too. Even if you’re using your own startup capital, you’ll want to ensure that your venture has a high chance of success.

This means research. You will need a five-year business plan with solid projections backed up with real data. A bank isn’t a wing-it sort of entrepreneurial pursuit. You’re playing with other people’s money.

Get Legal Backing

The law constantly ties up money. Whether that’s alimony, inheritance, mortgage regulations, you will need legal advice. Get a crack team together.

Yes, this will cost you money now, but it will save you money in the long run. You want your financial institution to be sound on all four corners. And legal is definitely one of those foundational pillars.

Marketing

When you’re online-only, you won’t have to deal with traditional marketing. Your overhead is much lower even in marketing. But you will need to bring people through your digital doors.

This means setting up online accounts with Google Adwords and Facebook ads. It means hiring writers and SEO agencies to help you with your inbound marketing. You’re starting from scratch, so you’ll need people who know how to navigate the online marketing world.

The Road Ahead Will be Rough but Worth It

Setting up a bank won’t be easy, but it could make you a very rich person. The ROI on lending money is massive. But you’ll need a ton of money to start out.

If you have what it takes, then go for it. If you love learning more about entrepreneurial opportunities, check out more of our awesome content.

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