How to Start a Bank from Scratch by Megan Caywood

Traditionally, the banking industry has been slow to innovate. It often delivers a user experience that leaves much to be desired. In this ProductTank London talk Megan Caywood, then Chief Platform Officer at Starling Bank, explains how the bank has challenged the status quo by introducing a current account that is entirely digital and tailored to the smartphone generation. She discusses the challenges involved in starting a bank and how to succeed in a highly regulated industry.

The Product Experience gap in Banking

The banking industry changed significantly after the 2008 financial crisis. More rules and regulations were put in place with banks facing heavy fines for breaches in compliance. This caused product innovation to be a low priority and the quality of the customer experience to stagnate. Meanwhile, user experiences elsewhere have advanced rapidly through new technologies and improved product practices.

These factors have created a gap between consumer expectations and what is delivered by the incumbents in the banking industry. In short, people have not experienced the same technical innovation from banks that they have benefited from elsewhere in their lives.

Starling Bank is a mobile-only, cloud-based product that offers a banking experience for the smartphone generation. There are no branches, and opening an account is a simple process completed entirely from a smartphone.

The critical factors expected from any current account are still there, such as contactless cards and digital wallets. But the digital-first approach adopted by Starling enables a richer user experience so that users can manage, control, and spend their money from their smartphone.

Requirements for Building a Bank

Being a regulated industry, launching a new bank comes with a particular set of steps and challenges:

• Get a banking licence – in order to develop a comprehensive alternative banking solution a full banking licence is needed. The process takes six months from submitting the application, but everything needs to be in place beforehand. Timelines imposed by the regulator therefore need to be factored in to the roadmap.
• Raise capital – a business needs significant capital to qualify for a banking licence, so investment must be raised while still in a pre-launch and pre-revenue state.
• Prepare for penetration testing – the regulators need to ensure integrity is in line with other banks, so they conduct a variety of tests related to security and compliance.
• Enforce restrictions – initially a banking licence comes with various restrictions and limits – such as a maximum deposit size per customer – which need to be observed to remain compliant.

These compliance-based obstacles are an additional challenge to the standard product development process in less regulated sectors, and they obstruct some of the best practice methods for developing new digital products. Adopting a Lean approach and launching a bare-bones MVP is difficult when you need to have raised millions and obtained a banking licence before you enter the market.

Have Clear Product Principles

When developing a product it is important to have key product principles that you believe will ultimately deliver your vision. Starling’s principles are:

• Full stack bank – innovate on both the front-end user experience and back-end banking technology, as developing on both fronts enables greater differentiation.
• Banking licence – in order to deliver a comprehensive banking experience, such as FSCS protection and keeping fees to a minimum, a full banking licence is needed.
• Design focus – ensure end-to-end user journeys are as frictionless as possible.

Key Considerations When Starting a Bank

1. Understand the status quo – what are the existing solutions? What are the recent industry trends? What changes in legislation (such as the PSD2 open banking initiative) are upcoming and likely to offer new opportunities?
2. Identify user pain points –
3. Determine your differentiation –
4. Identify the target market –
5. Understand “hygienic features” – what is expected by the consumer from incumbent products that new products can’t do without? This might be key features like direct debit, or questions on a sign-up form such as National Insurance Number which lead people to lose confidence if omitted.
6. Create revenue opportunities – be clear on how your strengths and differentiating factors will generate revenue and a viable monetisation strategy.