My old pal and Bankstocks.com partner stopped by the other day; I hadn’t seen him in over a year, primarily because he’s lately been spending over half his time in London building his phenomenally successful banking startup there called Metro Bank. But more on that in a minute.
If you don’t know about Vernon Hill and Commerce Bancorp., you’ve missed one of the banking industry’s all-time great stories of long-term growth (yes, growth) and value creation. It’s well-worth hearing in detail, but here’s an abbreviated version: Vernon started in the real estate business back in the 1960s helping Ray Kroc choose locations for McDonald’s restaurants (a skill that would become critically important to his future success). Then in 1973 he entered the banking business with the opening, in southern New Jersey, of the first Commerce Bank branch. Beginning with that single location, Vernon went on to revolutionize consumer banking and make his shareholders billions of dollars. Here’s how the New York Times described how he did it:
With a “Burger King approach” that standardized the look and feel of Commerce branches, Mr. Hill brought a retail mindset to banking that did not exist before. He focused on collecting deposits rather than making loans and on improving the customer experience rather than offering better interest rates. As rival banks championed the arrival of the cash machine, he opened friendly, spacious branches–and kept them open seven days a week.
“We believe that this is a retailing business and we want to drive as many customers into our stores as we can,” Mr. Hill said in an interview last year. “My competition sees customers in stores as costs so they do things to drive them out.”
His approach was an astounding success. Vernon grew Commerce from that one branch and nine employees in 1973 into a $48 billion juggernaut in 2007. Yet despite Commerce’s tremendous success, the regulators, in the single most outrageous instance of abuse I can recall in my 30-plus of following the banking business, forced Vernon out at Commerce for the sin of fully disclosing Commerce’s perfectly legal dealings with related parties. (It’s more than a little ironic, in my view, that regulators were coming down hard on a truly capable banker at just the point in the cycle when the banking industry could have used a few more capable bankers.) Soon after Vernon’s departure, Commerce was sold for $8.5 billion, netting Vernon over $400 million.
So what did Vernon do next? Simple: he replicated Commerce’s success in London via Metro Bank–the first new consumer bank in the UK in 138 years. It is essentially Commerce 2.0-only even more successful. Metro Bank has opened 19 locations to date with another six under construction; Vernon’s longer-term goal is to open 200. As noted, the bank is essentially using the same playbook that brought so much success at Commerce: woo retail customers (and their deposits) by offering first-class convenience and service. So far the playbook is working even better than it did the first time around. Metro has £900 million in deposits, a level that took Commerce 17 years to reach.
It’s hard to comprehend just how successful Vernon’s approach to banking is compared to that of Commerce’s 7,000 banking competitors in the U.S. or the ten competitors Metro Bank has in London, but the next two charts may help. The first shows the average number of retail checking accounts opened per branch, per month at U.S. banks. You’re reading those numbers right: the average U.S. bank branch opens just 17 retail checking accounts per month! (By the way, it closes on average 15 per month!) The best quartile of bank branches open on average of 25 per month and the bottom quartile open just 11.
Now compare those numbers to the number of checking accounts Commerce opened per branch per month during its heyday (around 300) and the number that Metro Bank is opening in London now (700). Those numbers are simply astounding!
Or let’s look at deposit dollars. The typical U.S. bank branch adds $2 million in deposits annually. For Commerce in 2007 (its last year of independence) the number was $20 million. At Metro Bank it’s $60 million. Again, simply astounding.
So Vernon Hill has, not once, but twice, and in two different markets, built growth machines in the supposedly mature and sleepy banking business. That has to make him the world’s greatest growth-oriented banker, probably of all time. If you’re interested in learning more about how Vernon upended an industry, I highly recommend his book, Fans! Not Customers: How to Create Growth Companies in a No-Growth World (Profile Books, 2012). In it, he discusses not only his strategies and tactics for banking, but also for another more obscure industry he’s been investing heavily in: pet insurance.
Metro Bank is privately held today with an impressive group of investors. Vernon Hill is the largest shareholder. I believe the company will likely go public sometime in the next few years, and I, for one, look forward to investing in a true rarity: a growth bank stock!
What do you think? Let me know!