Wondering if people have any examples of how one might cross this barrier to entry.
One is "raise over $13m." How? This is not impossible. There is more investor money looking for home today than ever, I reckon. However, this is not a level playing field. Who you are and who you know and how well will make a big difference. This is probably the wrong place for advice about this strategy.
The second possibility is "what is an easier/cheaper idea, that can later become a payment bank?" This is the HN philosophy, from our founder PG.^" Say you had $13,000. What could you build that would get you customers, impress investors or otherwise put you on a less direct path to what you want? Then, you are pitching "turn this thing into a bank" instead of "start a bank" which is a little easier.
This is hacker news so conventional advice here is take on hard engineering problems, and easy business problems. If this was a forum for business people, it'd be the reverse. There, people would rather take the challenge of raising a large sum but avoid hard engineering challenges. You need to figure out what you are strongest at. Are you the kind of person that can cold call your way I to a 7 or 8 figure investment or the kind of person that can build a product in 2 months that will get you investors or customers that will get you to the next step.
Finally, what you are asking is "how do I succeed at this very hard thing." There are no formulas that are easy and will work for most people.
Read this, pay attention to the bridgehead: http://www.paulgraham.com/ambitious.html
Taking the longer route to creating a bank while working on something in that direction is really good advice.
I'll read the pg post :)
Pitch large vcs and ask for a lot of money.
It goes against the YC grain, but it is the reason there are silicon valley vcs. It used to be that starting a company meant building chips and buildings and assembly lines, and some vcs are structured to write 30m series a, 50m total to build product, and then 50 to scale. A friend of mine is doing this in the database world right now.
If there is a 15m regulatory barrier, then your pitch is why your team is the right one to bet on, and you raise 30m. The money is out there, you can take it
Could you please give examples of a few such funds?
I am from Africa and needless to say, we don't have an abundance of VC funds for startups.
I have used products live Revolut and Monzo before and loved them, there is an opportunity being missed in places like Africa and other developing economies that have a huge growing youthful middle class that hates the way the established banks operate and is comfortable with technology.
I spent most of my free time last year building a backend that can handle some core banking functions, I already did research on the licensing and knew I would never be able to raise that money just with an idea and business plan so to keep myself going and also have something to show potential VC's I decided to start small, things like airtime top-up, bill payments etc
Break it down , look at the bits that you can build out and get some initial customers while you look to raise money, you don't have to go all out and build a whole bank, start small, licensing for things like e-wallets and money transfer is not unreasonably expensive, you can then go on to build on top of that
Good luck.
I have identified millennials to be my main market as well. In India whenever I visited the bank with my father, the person at the bank would try to sell a new card. They always want to "sell" you something, we just have to suck less as a digital bank and the millenials will happily help us get rid of the traditional banks. I've discussed Monzo with a lot of friends, and they have loved the idea.
Curious, what part of Africa are you from? What is the cost of the banking license like there?
So do you need a license from the start? Impossible to tell from your comment.
That is a good question. I'll see if I can still issue cards that links to one real bank account and if we can bypass being a payment bank.
I have learned a couple things about being the little guy trying to partner with bigger folks:
- Josh Elman (from Greylock) suggested that when (I think) when LinkedIn (or Twitter, I forget) was small, they didn't go out to look for partnerships with big companies, because they knew those wouldn't pan out because no one in a big company would care. They mostly sought relationships with smaller companies with some audience, but who were more receptive to talk to team up to crush the big guys and offer better value. Smaller competitors in crowded markets like banking are always trying to find ways to become more dominant, so they are more open than the folks at the top of the market.
- Just make your offering really really compelling - the "offer you cannot refuse" kind. This is not easy. This goes against traditional business sense, because you might have to offer value at less than cost. But if this is what the existence or growth of your business hinges on, you have to bend over backwards. Goes to the good old Dale Carnegie stuff; focus on their value in the conversation over yours. They need to feel like working with you is a steal of a deal. There are plenty of ways and business models to do this, but offering human capital, co-branding, offering equity or some rev share, customer insights, etc. are all fair game.
Coming up with an "offer you cannot refuse" feels a little tough given its just the too of us wanting to do this after working for one year after University.
We had a similar problem: we started with "let's build the city of the future", which would have probably required a large capital (of course, we wouldn't have done it alone, but still...), and ended up focusing on creating innovation at the financial layer of real estate, which we started with a few 100,000s of $$.
Doing good so far.
True. I should look at the smallest thing that I can do that can provide value and that can somehow pivot into a bank.
Good luck with your startup :)
Are you an engineer, or a banker? If you don't have a track record in the banking industry, you're hosed. No one will give you that kind of money. If you've actually been there for the founding of a bank before, then maybe. Moreover, if you're an engineer without banking experience, you probably have no idea what you're getting yourself into.
My only concern with such a large investment is that at the beginning you don’t know what you don’t know. You think $13m is a big problem, wait till you have that license and uncover all the reasons why people with $13m in their pocket have avoided the problem you’re trying to solve (just a maybe, but I’m sure there are other problems you’ll encounter you should look to resolve before you try dump so much money on a business).
1) Bring in co-founders whom raised $100m+ from VCs in companies they were in before. Also, one of those companies needed to have had an exit where it was very profitable for those VCs. Getting these co-founders is hard, but it is your fix. One of them needs to have been the CEO of the former successful exit.
2) Use $500k in capital to build the pre-launch version. Be hyper-capital efficient building the tech, for demos to investors. Bring the product working to investors along with those co-founders as part of the team.
Make sure those co-founders confirm that they think they can raise the capital in this business model.
Instead you should ask if there is cheaper way to get to where you want to be. You could start by researching how the PayTM guys did it.
With large amounts of money involved there will be more focus on risks involved and so it gets critical.
As an industry insider, what you do is buy a bond from a company that specializes in these sorts of licensing bonds. It should only cost you a small fraction of the capitalization requirement each year to maintain.
The bank offers to cover your fines (with your entire business as collateral), for a fee. You can think of hat fee as the interest rate on a loan, which it basically is because the money is put into an escrow account with the government.
In my own market it was $10M usd required to become a payment services provider (e.g. Venmo). But you could get someone to offer the bond for a few hundred thousand dollars a year, the price depending on how comfortable they were with you and your business. That’s within the realm of doable for a startup.
You can likely do what you want by partnering.
We are (now) a regulated entity with specific licenses that took us a crazy amount of time from the Reserve Bank of India.
Two things - first, the business models of payment banks is kind of unproven. Those of us who are in the fintech space in India kind of agree that the regulators kind of screwed up here. I'm hoping you have answers to that. TL;DR - a payment bank cannot lend.
Second, the regulatory structures in India are setup to look at license grants not as a consequence of capital. Even if you had a 100 million USD (and I know of specific examples here), there is very less likelihood of you getting a payment bank license unless you can prove out a gold standard team and board experience. Just to remind you, bank CEOs in India are appointed by the Reserve Bank. They are NOT appointed by founders or investors. One of the CEOs of a very large bank in India just got fired by the regulators for dancing around stockholding regulations - https://economictimes.indiatimes.com/industry/banking/financ...
I feel there is a very low chance of you getting regulatory clearance for this. Indeed, we give out a t-shirt that says "Because, its regulatory" to fresh employees at RedCarpet ! We are tech founders, but we have spent countless hours sitting outside RBI doors trying to make case for several regulatory changes. We were one of the first to get license grants for non-standard lending risk policies to the unbanked in India (that's a billion people!).
Write to me http://scr.im/redcarpetup if you want to come work with us for a while. Maybe you will stay a while and listen to stories of regulatory pacman in India.
You can issue a card in partnership with a bank or another license holder, but as i said before - in that case you better have a business model for that, because you aint gonna make money from MDR or anything.
I have read the news about the YES Bank CEO. I was hoping that they would be more relaxed with payment banks.
I'll drop in a mail over the weekend. I saw you guys when I was in my third-fourth year of University. I think the other startup that was doing something similar was Finomena but I see that your target market is different.
What I have noticed in Malaysia are startups effectively handling the {credit card, loan, insurance} applications & such other Web forms that banks are far too incompetent to do effectively.
Once you do this well, you will be on the right path.
If anyone could give any tips or help send me a email.
my username @live.hk
Also, I hope you're ready for an immense amount of red tape.
If you don't already know people and/or have deep expertise in the field, why would someone give you the money?
More likely, something like this would start inside another company or it would partner with a license holder at first.
because its so difficult most banks are very old and most new ones are established by existing players.
However, in the EU there are a few other banks to try [1], [2].
In the US, you could try [3].
There's also companies which partner with multiple banking services to provide a cohesive offering [4], [5].
For anyone wanting to do this, here's two issues that I have found.
1) If you don't have banking licenses, the conversation will stop abruptly. Even if they advertise that they may work with you from their website. It's a big hurdle.
To overcome that, I know of 1 company that may help [6]. If anyone knows of any more, please reply.
2) It's rare to talk to VP/Management level operatives, which is where you want to be. Unless you manage to dig out the CEO/COO email and contact them directly. Going from the bottom (contact us form) upwards just means you'll end up speaking to a Z level employee who doesn't know the banking business at all.
Disclaimer: I've contacted over 100 fintech companies. The whole state of affairs is pretty bad. It's improving, but won't be there until 2020 at least.
[0]: https://blog.faisalkhan.com/money-transmitter-license-applic...
[3]: https://www.crossriverbank.com
Or get a hedge fund to buy a bank shell, have it as an asset, and use that bank. If your startup fails, they still have the asset.
Or you may just need to have access to 13M, it's probably not the fee. So - you can just borrow 13M and use the 13M as collatoral. If you structure the deal right, it's 100% risk free. Moreover, you may be able to invest the 13M in which case you can still return an interest rate.
So you could find a fund with 13M, draw up the paperwork such that they put that in your company, but it can't be spent, and the 13M is effectively it's own collateral. Then pay the investors interest, plus some small coupon payment, or give them some equity for their risk free investment.
So long as the paid up capital isn't used for anything, it's a 'non transaction', i.e. it has no financial meaning.
That said, the 13M may be designated as collateral or some kind of requirement for the payments system.
wouldn't OP need equivalent collateral to borrow 13M even?
If it's always going to cost $13m to get a bank shell, then (although there might not be many buyers), the bank now has a $13m "thing" which they can take ownership of if it goes down the pan.
I'm closely looking at partnering with a bank. I could possibly look at banks that traditionally don't have a lot of debit card sales and see if they are interested in what I have to offer.
Better launch a new product first, make revenue like the product i posted and use that money to fund your big business.
Here in Australia there is a team building a new bank and having good success doing so. In order to overcome the institutional barriers like the one the OP raised, the team consists both of highly experienced corporate "grey hairs" and talented young hackers/designers.
This way, they have the industry experience and network to ensure the company is run competently and prudently, whilst also being able to leverage the energy and creativity of younger hacker-types who can bring new ideas to the market.
I'd suggest to the OP that this kind of approach may work for them.
Once you are onto something, the regulations can be satisfied by backers who see a business plan, cashflow from the side of the business, or perhaps new regulations will form around the new company's business model.
There is no way around this kind of regulation, and they definitely are not going to 'change their minds' once they see someone has broken it. They're going to put someone in jail.