Vernon Hill is the best damn banker alive (Just ask him)September 15, 2010: 3:00 AM ET
The impresario who upended retail banking in the U.S. is taking his show on the road ... to London.
In the hidebound world of British retail banking, the launch of a new bank last July -- the first in 138 years -- was certain to make a splash. Even so, the grand opening of Metro Bank was something completely different:
On the sidewalk at Metro's glitzy flagship branch, across from the Holborn tube station, dancers sporting vermilion fright wigs paraded on stilts. Dixieland bands tooted, shoeshine crews buffed, and waitresses toted giant trays of ice cream, 5,000 cups in all. Jugglers' batons filled the air, along with white balloons embossed with the legend JOIN THE REVOLUTION!
Inside, the giant floor-to-ceiling windows and long, open granite counters lined with smiling tellers, sans Plexiglas, recalled the lobby of a fancy Las Vegas hotel. Signs rallied customers to LOVE YOUR BANK AT LAST and pledged NO MORE STUPID BANK RULES. Bicycles stood parked on the polished marble floors, alongside corgis and poodles (DOGS RULE! posters proclaimed) downing bowls of dog biscuits as their masters opened accounts. "I've never seen a bank like this," says a street musician in attendance. "How can you not love a place that's open on weekends and looks like a disco?"
The impresario behind the party was Vernon Hill, a flamboyant, tradition-stomping American billionaire. Hill, 65, founded Commerce Bank in the U.S. and outfoxed the giants in the business by putting lavish customer service first --- the model he's now transplanting to Britain. Before he was forced out of his own company by regulators, Hill built himself an Italianate mansion in New Jersey that's almost as large as the White House.
Hill did little to dispel his image as the P.T. Barnum of banking at the VIP party following his grand opening in London. Blond comb-over plastered in place, he wore a double-breasted silk suit with a gold collar pin and cradled his Yorkshire terrier -- Sir Duffield, or Duffy for short -- in his arms, feeding him canapés from trays that passed by.
And yet consider the guest list. Jamie Reuben and Harrison LeFrak, representing leading real estate families in London and New York, were there -- both are investors in Metro. Meredith Whitney, the prominent banking analyst and a longtime Hill fan, was in attendance, as was Gene Lockhart, former CEO of MasterCard International (MA), now a Metro director. Billionaire investor Wilbur Ross, who's backing a fledgling banking venture by Virgin chairman Richard Branson, made an appearance. What these people understand is that Hill -- nicknamed "Vernon the Barbarian" by rivals in the U.S. -- may just have the best brain in retail banking.
More retailer than banker
Starting with a $1.5 million investment and a single branch in 1973, Hill built Commerce Bank into the fastest-growing franchise in America. In more than three decades leading Commerce, he increased deposits at a 30% annual clip and delivered shareholders returns of 23% a year, rivaling the long-term performances of Warren Buffett at Berkshire Hathaway (BRKA 27%) and Larry Ellison at Oracle (ORCL 31%).
"Hill is probably the most influential banker of the last two decades," says Thomas Brown of Second Curve Capital, a hedge fund specializing in financial services. "He totally changed the industry by showing the value of branches and deposits." In fact, Hill considers himself more retailer than banker. "The worst thing that could happen is that we turn into bankers!" he warns his troops. Like all great retailers, Hill understands what the customer really wants. And in banking, he found that what truly excites people, what turns them into loyal fans, is superb, lavish, even outrageous customer service. "That's the exact opposite of the approach of the big banks in both the U.S. and Britain," says Hill. "They think customers choose the bank that pays the highest rates. They're wrong. People will choose your bank at lower rates if you give them a better experience -- if you spoil them."
The power of customer service is that it pulls in tons of deposits. And for Hill, attracting low-cost deposits, especially at a rapid pace, is the true source of value in banking. We'll get to the math a bit later, but the idea is that by parking those cheap deposits in extremely conservative loans and safe securities, a bank can become immensely profitable.
Hill violated the central canons of banking in everything from rates to acquisitions. He refused to compete on price, astounding competitors by offering some of the lowest rates on savings, yet still stealing their customers and deposits. To preserve his "service is everything" culture, Hill shunned mergers -- the main way banks expanded in both the U.S. and Britain -- and built Commerce almost entirely from scratch, as he plans to do with Metro. "Mergers are all about closing branches and gutting service. They're like two drunks trying to prop each other up," declares Hill, who is a teetotaler.
Most of all, he shuns orthodoxy by putting loads of money and training into coddling customers. "Retailers that invest in their stores do well," says Hill. "Those that disinvest, like most banks, do poorly." In the early 1970s, Commerce was among the first banks in the U.S. to stay open in the evenings and on Saturdays. Hill introduced free coin-counting machines. "Those machines cost $40,000 each, and they're free to non-customers!" says Hill. "Just try to get a committee at a big bank to approve that expense!"
The Hill story features just about every thrill, including a minor scandal. Hill is in London because regulators pushed him out of Commerce near the peak of the market, causing one of the best-timed sales imaginable. In 2007 the Office of the Comptroller of the Currency demanded that Hill leave Commerce after investigating contracts between Commerce and Hill family members. In October 2007, days before the S&P hit its all-time high, TD Financial agreed to buy Commerce for $8.5 billion, garnering Hill more than $400 million. The authorities concluded the investigation without bringing charges, and the hyperactive Hill -- keen to prove that his model would work anywhere -- attacked London. It's a dream market, he claims, because customer service in London is far worse than in the U.S. "Opening an account here is like getting your teeth drilled," he says. "The only people who won't bank at Metro are the people who want to be abused."
Hill is a creature seldom seen in modern banking, an empire builder who lives like a mogul from another century. His gigantic home in Moorestown, N.J., a town settled by Quakers in 1682, is loosely modeled on a Palladian palace. At 50,000 square feet, Villa Collina, Italian for "hill house," ranks among the dozen largest private residences in America. The driveway, flanked by eight reflecting pools, leads to a limestone-and-stucco façade half the length of a football field, punctuated by giant Ionic columns. The foyer contains a 15-foot chandelier custom-made by the Murano glassworks in Venice. Hill loves to serve visitors Cabernet from his on-site vineyard in featherweight, handblown Murano wineglasses.
The gym, at 4,000 square feet, is the size of a health club. The Hills cultivate exotic fruit trees in their limonia -- a visitor might come away with a box of lemons in January. The house, like Hill's banking ventures, is really a partnership with his wife of 36 years, Shirley. (The couple has two grown children.) It was Shirley who designed Villa Collina and supervised its construction -- she sent a curving, double-height, marble staircase that didn't fit back to the artisans in Venice for a replacement. At Metro, Shirley plans every detail of the branches just as she did at Commerce, from the red-and-blue neon bands on the coin-counting machines to the curving, super-mod sofas to the candy-striped tights on those dancers on stilts.
The art of living large extends to Hill's favorite pastime, golf. He built an exclusive golf club near Atlantic City, called Galloway National, at a cost of more than $10 million. Hill rides around Galloway in a special golf cart, souped up to travel 10 miles an hour faster than all the others. Galloway was planned by Tom Fazio, the renowned golf course designer, who attended Metro's opening in London. "Vernon has a stutter that used to be a lot worse," says Fazio. "He was giving a sales pitch to a bunch of golfers to get them to join, and he can barely get the words out, but he keeps pitching. I said to myself, 'This guy's got guts!'" For pure spectacle Fazio arranged for Hill to play a round in Florida with another excellent golfer, Donald Trump. Fazio says that the trash talk by the dueling comb-overs never stopped. "The language," he says, "was unrepeatable."
Building a bank
Hill grew up in Northern Virginia, the oldest child of a real estate agent who was also part owner of a local bank and encouraged his son to go into banking because he thought it was the height of respectability. As an undergraduate at the Wharton School, Hill worked afternoons as a mortgage loan officer at a local bank. The experience, he says immodestly, helped him to "read a bank's balance sheet the way a maestro reads music."
After graduating he started a real estate brokerage firm that found, and sometimes developed, sites for new McDonald's (MCD) restaurants. He even drove McDonald's patriarch Ray Kroc around the Philadelphia suburbs on a few scouting trips. "I was fascinated at how McDonald's created the same look and same experience in every location," says Hill. "I also learned that costs are relatively fixed, so it's all about volume." Hill is still a big player in fast food and retail development. He's part owner of 36 Burger Kings (BKC) near Philadelphia. A major source of his wealth is his stake in his first venture, Site Development Inc., which owns or leases sites for around 400 CVSes (CVS), Jiffy Lubes, Taco Bells, and other chains on the East Coast.
In 1973, at age 27, Hill launched Commerce as a single branch on a four-lane highway in southern New Jersey with nine employees. In the middle of the OPEC oil crisis he'd drive around in a big Lincoln, wearing aviator sunglasses, carrying along a giant book from the FDIC that listed the deposits of every branch bank in the region. He would find a rich one, open a branch of his own nearby, and lure its customers away. The Commerce branches, designed by Shirley, had a uniform look that was open and airy -- homey, redbrick façades with skylights and street-to-ceiling windows.
The challenge was twofold: to keep building branches and to increase deposits at existing ones, or in retail-speak, expand same-store sales. The strategy was to provide service so extraordinary -- staying open on weekends, opening accounts in 20 minutes -- that customers would accept lower interest rates and still flock to Commerce. It worked. Commerce got a huge boost from the wave of disastrous mergers that disrupted service in New Jersey and Pennsylvania. Hill feasted from the takeover of Summit Bancorp of New Jersey by FleetBoston in 2001. As Fleet shuttered branches, Hill stole its displaced customers with a program called "Sink the Fleet," splitting a $5,000 "bounty" among the staff at a Commerce branch if a neighboring Fleet outlet closed. At Commerce offices, employees threw Fleet brochures into a giant model periscope to symbolize their mission.
Hill recognized that the economies of scale, and the big money, lay not in mergers but in the branches themselves. Here's how the math worked. Hill reckoned that a suburban branch with $30 million in deposits earned a modest $500,000 a year. That's a 5% margin, or about $1.5 million, less $1 million in expenses. But as deposits grew, costs barely budged, while profits exploded. By the early 2000s the average Commerce branch was approaching $100 million in deposits. An increase from $30 million to $100 million meant a sevenfold jump in profits, to around $3.7 million. Talk about same-store sales: From 2002 to 2007, Commerce raised its deposits per branch by $19 million a year, vs. the national average of $2 million.
It was the move into New York City in 2001 that gave Commerce its biggest spurt in growth. At the time two banks -- J.P. Morgan Chase (JPM) and Citi (C) -- controlled over 60% of the retail market in Manhattan. Most analysts thought that Commerce couldn't compete. Hill disagreed. "They say that New York is the city that never sleeps," he announced. "Except for banks." At the time, the big banks opened at 9 a.m. and closed at 3 p.m., often charged for checking, and imposed lots of hidden fees. Hill brought his standard model: long hours, including weekends, and free checking and lower fees, not to mention smiling, canine-friendly tellers. Hill loved New York because the economies of scale were even bigger than in the suburbs, for a simple reason: Although the costs were higher, the potential deposits per branch were astronomical.
In Chinatown lines of customers several blocks long and four abreast crowded outside the sparkling new branch on opening day in 2005. In its first month the Chinatown outlet amassed an unheard-of 18,000 accounts and eventually grew to over $200 million in deposits. The branch at 2 Wall St. collected $347 million, generating $15 million in annual profits. When Hill learned that Chase was leaving a trophy ground-floor location at 14th Street and Fifth Avenue to move to the second story, he dispatched Shirley to look over the branch, masquerading as an insurance auditor. Commerce did move into the first floor, and Chase languished upstairs. "Customers practically had to go through us to get to them," says Hill. "Chase got the cheap rent, and we got the deposits."
Hill threw an annual bash at Radio City Music Hall for 8,000 employees. As the curtain rose, the boss would appear in a red-sequined tuxedo, flanked by the Rockettes in a high-stepping chorus line. "I had to really kick," exclaims Hill. "Those Rockettes have long legs!"
For all his success, Hill left himself vulnerable on ethical questions in a highly regulated business. For many years Commerce had been paying big fees to Shirley Hill to design the branches and to her husband's partnerships for leases under more than a dozen branches. In 2007 the regulators demanded that Hill end those arrangements. They also banned Commerce from opening new branches, the lifeblood of his business, unless Hill resigned. After Hill stepped down he signed a consent order requiring that any bank in which he's a major shareholder conduct an independent review before approving contracts with companies owned by Hill or members of his family.
Breaking into the British market
For his comeback in Britain, Hill achieved a remarkable feat by navigating the forbidding, labyrinthine regulatory process. By mid-2008, Hill had commitments for around $150 million in startup capital to launch Metro. But after the collapse of Lehman in September, most of the money disappeared. The British authorities wouldn't issue a license unless the bank was practically ready to open, with people, systems, and branches fully in place. So Hill paid those expenses with $30 million of his own funds, with no assurance he'd get approval. In February of 2010, the British regulators granted Metro that first-in-over-a-century license.
Banking in Britain is far cozier than in the U.S. Dominating the market are just five giant "High Street," or deposit-taking, institutions: HSBC, Royal Bank of Scotland, Lloyds, Barclays, and Santander of Spain, which bought a number of smaller players. In general the branches are old and dowdy, located in dark prewar buildings with the tellers behind Pleixglas windows. Customers can't open accounts on the spot; they're routinely told to make an appointment for, say, next Wednesday. At a Lloyds branch near the Metro outlet, a posted calendar advises customers what times to avoid because of the line -- the hours from noon to four, Monday and Friday, are coded "red." Hill stands reading the calendar and shaking his head. "They're telling you not to come in when it's convenient for you! I love it!"
Amazingly, retail banking is profitable in Britain, in part because the same big players have seldom faced challengers, until now. Hill estimates that the London metro market is around the same size as New York and its suburbs, holding some $700 billion in deposits. Within 10 years he wants around 200 branches in London and around $50 billion in deposits, the amount held by Commerce when it was sold.
Hill has another big idea, this one a business that he's helping to transplant from Britain to the U.S.: pet insurance. He's a major investor in Petplan USA, which holds the U.S. franchise from Petplan of Britain, the world's biggest provider of policies for companion animals. "People used to put down their pets when they got sick," says Hill. "Now they're members of the family. People will want to save them with kidney transplants and hip replacements. This business will be huge." Hill's own dog, Duffy, recently had 11 teeth pulled, and Petplan paid the $2,400 bill. The terrier has since returned to his regular diet of kobe beef and dulce de leche ice cream. Recently Hill persuaded both Tom Fazio and Meredith Whitney's husband, the former professional wrestler John Layfield -- whose ring names have included "Vampiro Americano" and "Death Mask" -- to take out insurance for their pets. It's always showtime for Vernon Hill.