Should I Buy or Build a New Bank?

In this article, we’ll consider whether you should buy an international bank or start a new bank from scratch. The buy vs build debate is the number one question I get and what most people are debating when they call me asking about an international banking license. So, here’s what you need to know about buying vs. building in the international banking industry.

While this post will look at Puerto Rico, St. Lucia, and Dominica, 95% of the activity in the international banking industry is in Puerto Rico. This is especially true on the buy side, where demand and competition are intense. 

Setting Up a New International Bank

The steps to apply for a new international bank license are as follows: 

1. Draft a detailed business plan with financial and compliance documents.
2. Provide 3 years of audited financial statements for all officers, directors, shareholders, investors, and key persons.
3. Get a 3rd party background check for all of these same people.
4. Prepare and file the application package.
5. Wait about 12 months
6. Negotiate the terms of the license and capital requirements.
7. Receive your international banking license. 

Getting all the documents together, and filing the application, takes at least 3 months. Then, most jurisdictions require about 12 months to give you an answer. Of course, this is not under our control and it may take longer. For more on the process, see Start a Bank in Puerto Rico in 10 Steps.

In most cases, you’ll have spent $250,000 to $350,000, half upfront and half upon receipt of your license, to get your permit. This can vary by jurisdiction, and the background reports are billed per person, but this range covers 90% of the cases that I’ve seen.

Once you have your license, now it’s time to build out your business. This means hiring your employees, setting up your core software and systems, and generally getting the business ready for launch. In my experience, your best-case scenario here is 6 months, though this can progress at your pace.

Buying an Existing International Bank

Therefore, when we price an international bank license, we look at about a 24 month time to market valuation. What’s 24 months’ time to market worth? That will depend on you and whether you have clients ready to go now into your new bank.

Your costs to acquire a bank should be the same as they are to start a new bank. This is because the process is identical. All the documents and processes are the same, but the difference is that the timeline is very condensed.

If you can get through negotiations with the seller in 30 days, and be approved by regulators within 30 to 60 days, you’re looking at 60 to 90 days to have a fully operational bank. Such a bank will have a few employees, an office, its core systems, etc. 

But, keep in mind, that all investors, shareholders, officers, directors, and key persons need to provide financial statements and background reports. The due diligence process is the same on a new license as it is on a purchase. 

A small international bank in Puerto Rico will sell for $5.5 million to $6 million. That same bank in Dominica will sell for about $2 million. In St. Lucia, market value is $3 million to $4 million. For an example from Puerto Rico, see Banks for Sale in Puerto Rico.

The above assumes that the bank you acquire is small with no significant deposits. Of course, the amount of and jurisdiction of deposits will have an impact on the bank’s value. The suggestions herein look at the time to market only and not at book value.

A small bank in Puerto Rico with Fedwire will ask for around $15 million and banks with sizable books of business will ask for much more. For example, a bank with a net profit of $5 million a year is asking for $36 million.

Note that the above examples do not include the capital required to own a bank. For example, if you were to purchase a bank in Puerto Rico for $5 million, you would also need corporate capital of $2.5 to $5 million. If you were to take over the bank for $36 million, you would need about $28 million in capital. The bottom line is that the purchase price does NOT include corporate capital (tier 1 or tier 2).

Buy vs Build

So, when we look at buy vs build, the question goes back to the client – how do you value 24 months’ time to market? If these 24 months are worth $5.5 to $6 million for a fully operational bank in Puerto Rico, then you should consider a purchase. If you do not value 24 months near this number, then you should focus on a new license.

In my experience, businesses that are adding banking as a service to their portfolio, and have the clients ready to come in now, prefer to purchase an existing bank. Those who are starting up a new business are comfortable with building it out over time and prefer a new license. 

There are always different risks or concerns when you look at buying vs. building. When you acquire a bank, you run the risk of undisclosed issues, future fines from regulators from prior bad acts, etc. You will conduct an audit of the bank prior to purchase, but there are always issues and there is always hair on a bank sold at a low price.

With a new license, you run the risk of regulators not issuing a license in a timely manner or that you will lose out to better-qualified applicants. If regulators issue 4 licenses a year, they will go to the better qualified. For statistics on Puerto Rico, see How Many International Banks are there in Puerto Rico.

I believe that the bottom line for investors should be relatively straightforward: do you value 24 months’ time to market at $5.5 million in Puerto Rico or $4 million in St. Lucia? Then purchase a bank. If not, I will be happy to assist you to file a new license application.
I hope you’ve found this article on buy vs. build an international bank to be helpful. For more information, please contact me at info@banklicense.pro. I will be happy to assist you to acquire an existing bank or start one from scratch. I will also personally write your business plan and handle your negotiations with regulators.