How to start your own bank

    4 March 2017

    How on earth do you ‘start a bank’? It sounds like a nigh-on impossible project. Yet in the past few years the UK has seen a flourishing of start-up ‘challenger’ banks – from the likes of customer-friendly Metro Bank, which advertises its 48 branches as ‘stores that are open when it suits you’, to small-corporate lenders such as Aldermore and OakNorth, to mobile-app-based Atom Bank (‘The future of banking, available today’). There’s even one called CivilisedBank. This is all surely a good reason for the traditional high street banks, whose millions of customers are habitually dissatisfied, to feel nervous. But if new banks are popping up all over the place, how do you go about launching another one with a distinctive market appeal?

    In 2013, Graeme Hartop left his job as managing director of the banking arm of the Scottish Widows investment group. He had been headhunted by his former boss, Ray Entwhistle, whose plan was to do something no one had done in the UK for more than 30 years — open a new ‘private bank’ offering financial services tailored for high-net-worth individuals.

    When Hartop joined Scottish Widows Bank back in 1995, that too was a start-up, and Entwhistle had been involved in the launch of the last new private bank in the UK, Edinburgh-based Adam & Co, which opened in 1983. Even so, building a private bank from scratch at a time when the market seemed fixated on digital rather than face-to-face banking might have seemed foolhardy.

    Entwhistle and Hartop thought differently, and came up with a plan to offer potential customers ‘a dedicated private banker’, in person or on the phone, to look after them. ‘There was a realisation that during the credit crunch a lot of the “relationship banking” had been removed from a number of competitors in the private banking sector,’ says Hartop. He believed many people were not only looking for a bank they could trust, but also one that would offer a friendly face.

    If that was the case, then why hadn’t anyone else tried to do what Entwhistle and Hartop had in mind for their project? Under the previous regime of the Financial Services Authority — deeply risk-averse in relation to new ventures even as it made such a mess of overseeing the established large banks — a start-up might have been just too difficult to contemplate. But in 2013, the FSA was dismantled and replaced by two separate regulatory authorities, the Financial Conduct Authority and the Prudential Regulation Authority. The PRA, which took charge of banks, made regulatory changes which removed some of the barriers that had made it so difficult for new banks to open in the past.

    The aim was to allow and even encourage more ‘green shoots’ competition in the banking sector. Accordingly, the new regime created the ‘mobilisation’ route, which gives start-up banks the certainty of becoming fully authorised when they are fully operational, but without having to have all of the elements of the new bank in place from the word go, as was previously the case.

    The bank that Entwhistle and Hartop created, Hampden & Co, was one of the first to receive its licence under the new process. But even under these new rules, starting a bank remains far from easy. Hardest, says Hartop, was finding the initial investment. ‘We raised just over £60 million of capital… and I always knew that that would be the most difficult part of the project.’ A couple of years’ preparatory work was required before Hampden & Co finally opened its doors in Edinburgh in July 2015.

    As well as capital, a new bank also demands plenty of time and seasoned executives. ‘You can’t get up and start a new bank within six months or so,’ says Hartop. ‘ You don’t go into it lightly. A strong and experienced team is the most important aspect. For somebody who hasn’t got much experience in banking — unless of course they’re going to hire a lot of people that have got that experience — it’d be very difficult to get through the [regulatory] process.’

    Having the right people in place is also essential for attracting customers; a lot of the bankers now working at Hampden & Co brought clients with them, and from that initial client base the bank’s reputation has encouraged the customer base to grow. ‘We’re approaching a couple of thousand customers now and we’ve got about 70 staff,’ says Hartop. ‘So the business is going well.’

    Some people clearly like the personal touch Hampden delivers, and are willing to pay for it. But in the digital age, it’s not for everyone — and not just because they don’t have the cash.

    Others are drawn towards technology-based challenger bank models that have also found niches they think customers want. Like Tandem, which was crowdfunded and launched in 2015 to focus on pro-active money management — alerting the customer when they approach their overdraft limit and giving advice on how they could save money on, for example, electricity bills or subscription packages. Or Monzo, which prides itself on the ease with which a customer can open an account, claiming it can be done in under a minute.

    An online bank might not need the smart premises or the platoon of presentable client-handlers that a private bank does, but getting through the red tape involves exactly the same processes. The current regulatory regime has opened opportunities for imaginative new ventures — but the simple answer is that starting a new bank requires serious capital-raising (even digital-only banks have generally had to raise in excess of £70 million to get on their feet) plus people with deep knowledge of the banking sector, plus time… lots and lots of time.

    It’s an expensive, laborious and meticulous process, but at least it’s easier than it used to be. What are we waiting for? Crowdfunding for the Spectator Bank starts now.