Banking Chapter 4 - Establishing Financial Institutions

Establishing New Financial-Service Institutions

• Financial-service facilities are established today for the convenience of customers, which is rapidly changing due to technology.
• Financial firms have several options to respond to customers' changing demands: • Chartering new (de novo) financial institutions • Establishing new full-service branch offices • Setting up limited-service facilities

Chartering a New (De Novo) Financial-Service Institution

• No one can start a financial firm without the express approval of federal or state authorities.
• The public's need for a new bank in a particular location must be demonstrated.
• Founder stockholders must supply enough start-up capital to cover several years and show that the proposed new institution will achieve adequate levels of profitability.
• Government chartering agencies believe financial-service providers need special scrutiny because: • They hold the public's savings • They are at the heart of the payments process to support trade and commerce • They have the ability to create money (through granting credit), which suggests that chartering too many might lead to financial struggles

The Bank Chartering Process in the United States

• Only the banking commissions in each of the 50 states and the Office of the Comptroller of the Currency (OCC) can issue a charter of incorporation to start a new U.S. bank.
• Federal standards for receiving a bank charter are more rigorous than the rules of state banking commissions.
• Organizers often seek a federal bank charter for the added prestige it conveys in the minds of customers, especially large depositors.
• The choice between pursuing a federal or a state charter usually comes down to weighing the benefits and costs of each for the particular bank and its location(s).

Questions Regulators Usually Ask the Organizers of a New (De Novo) Bank

• What is happening to population growth, incomes, types of occupations represented, educational levels, and the age distribution of residents in the proposed service area?
• Who is to own any stock issued? What amount of stock will be held by the organizers, directors, and officers?
• How experienced are the organizers, management, and board of directors of the new institution?
• What are the organizers' projections for deposits, loans, revenues, operating expenses, and net income for the first few years?

Factors Weighing on the Decision to Seek a New Charter

• External factors: • The level and growth of economic activity • The need for a new financial firm • The strength and character of competition in supplying financial services
• Internal factors: • Qualifications and contacts of the organizers • Management quality • Pledging of capital to cover the cost of filing a charter application and getting under way

Establishing and Monitoring Automated Limited-Service Facilities (“Branchless Banking”)

• There has been a recent spike in branchless banking due to the high cost of chartering new financial firms and setting up full-service branch offices.
• Examples of automated limited-service facilities include: • Point-of-sale (POS) terminals • Automated teller machines (ATMs) • Telephone banking • Internet-supplied services
• The decision to install a new ATM involves considering its cost, life expectancy, and the number of cash transactions it will handle per year.

Banking in Homes, Offices, Stores, and on the Street

• Telephone banking and call centers remain a popular channel for customers to interact with financial-service providers.
• Internet banking features include: • Verifying account balances in real-time • Moving funds instantly between accounts • Confirming deposits and transactions • Viewing and printing images of checks • Submitting loan and credit card applications • Conducting online bill paying

Financial-Service Facilities of the Future

• Despite advancing technology, the total number of financial-service outlets may not decline significantly for a time.
• The use of "digital cash" will permit customers to be their own financial-service branches for certain transactions.
• Service providers will evaluate the success of their branch offices and limited-service facilities in terms of profits and costs per square foot.
• Outsourcing of financial service delivery is likely to grow.