Not many analyses of what went wrong with banking during the financial crash mention McDonalds or John Lewis. Indeed, few people seem to connect retail banking with the wider retail sector at all. Vernon Hill has been on a lifelong mission to change that. Having founded Commerce Bank in the New Jersey town of Marlton in 1973, he sold it to Toronto-based TD Bank for $8.5bn in 2007. Not bad for someone consistently dismissed as being wrong.
Hill has followed up this success by launching the UK’s first new bank for 100 years. Metro Bank is built using the same model that worked for Commerce Bank. But the original inspiration for that model came from an unlikely source. In the late 1960s, Hill worked in property development and worked closely with the McDonalds founder Ray Kroc, developing sites for the new fast-food chain.
I took some of the McDonald's view of life and adapted it to banking
Having studied banking at university, Hill realised a more customer-centric model could easily be applied to the banking sector, allowing his new bank to stand out from the crowd. “When we launched Commerce Bank there were 24,000 banks in America. We had to find a way to be different. I took some of the McDonald’s view of life and adapted it to banking.”
There was more to success than just good service. The service allowed the bank to pay less on deposits. And it meant that it could attract a better mix of deposits. “I realised that customers care more about service than about rates. We grew at 25% a year and were the low-rate payer. Over time our cost of money was lower than the market by about 75 basis points. That was down to low rates and a better mix of deposits. It took 18 years to grow Commerce Bank to $1bn in assets, with Metro Bank it has taken us just over two years.”
One reason Hill is confident the business will succeed is the lack of anything similar here. “We are what in America we call a community bank. That means you are part of the community, you know the customers,” he says. This is different from what he dismisses as the “product sales model” in British banks. “We have learned to grow the community banking model onto a large scale.”
Some analysts question the stability of a bank expanding at approximately 300% a year. But Hill doesn’t see this growth slowing. The business is funded by private investors, with talk of a listing in 2014. Hill and his co-founders have raised a total of £250m, mostly from American investors, with Hill owning 21% of the business.
There was a minor blip in September when co-founder and chairman Anthony Thomson left, issuing a statement about not wanting to run a public company. And all those fancy branches and long hours don’t come cheap. The business continues to lose millions, although it claims it will break even in 2014.
Hill claims the mainstream banks have “been too busy with other stuff” to pay Metro Bank any attention. But should customer defections continue, they will start to take notice. Not that Hill is worried. He may not be a user of market research, but he uses net promoter scores. This is the percentage of customers who recommend a company to their friends. Hill says that UK banks have negative net promoter scores. “I had never seen a negative net promoter score until I came here. It’s astonishing.”
One major difference in the business model is how the bank is funded. “When we sold Commerce it was the 18th largest bank in the US but we had no debt and no wholesale funding. Metro Bank is the same and I don’t expect that to change. It is funded by stable, lasting core deposits. European banks are more heavily into the wholesale money markets. But it is core deposits that create lasting value,” he says.
He is also confident the company culture, with its relentless focus on customer service, will pay dividends. “Culture is even more important in a rapidly expanding start-up,” he says. “Being new is a plus. We have modern, new IT systems, whereas the rest of the banks have old, legacy systems. The challenges we face are growth challenges. How can we grow 300% this year and 200% next year? And how can we keep growing at these rates and not weaken the company and culture.”
The key, says Hill, is to recruit people with the right attitude and then train them well. “You have to be fanatical about how you execute your model. If you get this right, and we know the brands that do, you build a base of fans who are loyal and bring in friends.”
Hill admits that the idea of disruptive entrepreneurs in banking is not obvious. “The idea of new banks and banking entrepreneurs is not a European one,” he says. “It is more an American tradition.” But he is adamant Metro Bank will improve competition in the market. “The big banks claim the UK is highly competitive. There are six banks in the UK and 173 in New York. Draw your own conclusion. You don’t get competition unless you get choice.
“Evidence from the US shows small banks have better relationships with small business. Most small business lending in the US is done by community banks. They have direct relationships with the customer. The more separate the banker is from the client the less credit there is and the weaker the credit is.”
He says UK banks have failed SMEs. “Banks don’t have lending authority. Decisions go to credit committees. They make them on the numbers and not people. Small business lending is a people business. You have to read the numbers, but in the end experienced people have to look other people in the eye and make a decision.
"And you make more loans and better loans the closer you are to borrowers. If you have payment problems, are you going to pay the guy around the corner or the big national bank where you don’t?”
What’s so different about Metro Bank?
From its glitzy, glass-fronted branches (which it prefers to call stores) open for long hours, seven days a week, to promoting itself as dog-friendly (it offers dog biscuits and bowls of water), Metro Bank has set its stall out as being different. The focus is on a retail service model. As well as opening branches all week, it offers immediate services such as opening accounts (and switching direct debits) on the spot, and it prints credit cards in store. Co-founder Vernon Hill says each Metro Bank branch is opening an average of 700 accounts a month, twice the average rate for his last venture, Commerce Bank, in the US.
Hill is confident the branch-based model will work as well as it did in the US. “When we were building Commerce during the 1990s conventional wisdom was that the branch was dead and it was going to go to ATMs and the web. But customers want to choose their delivery channel. We like to offer the best of all those channels.”