Since our last newsletter, Vernon Hill, the head of Commerce Bank (based in Cherry Hill, New Jersey) has resigned, apparently due to regulatory issues. In light of this, some analysts and reporters suggest that the time is now ripe for Commerce’s acquisition either by a bank wishing to expand in the East Coast (in particular New York) or by a foreign bank wishing to enter what has become a very attractive market area. Others have critiqued the Commerce operating model as unsustainable.
Whatever its future, either as an independent bank or as part of a larger company, Commerce Bank has changed the face of retail banking in New York and the nation. For those who do not know Commerce, the bank has achieved remarkable growth with assets of approximately $50 Billion up from $10 Billion six years ago, operating 450 “stores.” It is an acknowledged retail banking leader establishing itself as, in its own phrase, “America’s most convenient bank.” It has also built very strong relationships with customers due to its remarkable customer service. (For my own Commerce customer service story, click this link to a 2003 newsletter.)
Its retail emphasis and strength at customer service successfully challenged banks many times its size and pushed at least some of them to reconsider their semi-hostile approach to customer relations. Commerce changed the game in New York retail banking, and it continues to change the game in every market it enters. Its success has also resulted in several me-too imitators, with, in most cases, those imitators offering pale copies of the original.
What has made Commerce so unique in a business known for commoditization of products and homogenization of approach?
* Retailing, not banking. Anyone who knows Vernon Hill, the former Chairman, also knows that he views banking as retailing and wants to provide customers with an excellent retail experience.
The May/June issue of BAI Banking Strategies presents a very informative interview with Hill in which he differentiates Commerce from other banks: “You should look at Commerce not as a bank, but more like Starbucks for this reason: why are you paying $5 for a cup of coffee at Starbucks when the guy outside is selling coffee at $1. You’re obviously getting something else. The same is true with Commerce. Customers are giving us more of their low-cost money for their retail experience.”
The bank operates like a retailer in ways big and small, opening weekends and extended evening hours, giving lollipops and “C”-shaped banks to children, providing coin counters to customers and non customers alike, and offering a “look” that welcomes the customer. Vernon once mentioned to me, correctly, that when you walked by what was then Fleet Bank, all the blinds were down, sending a negative message to the customer; Commerce goes for the opposite impact.
* Simplicity. Commerce operates with a limited product set and an intense focus on those areas that generate the highest profits: “Our philosophy is: the real value in a bank is core deposits — not loans, but core deposits.” Every bank knows this, but those that are the most profitable, like Commerce, operate with an intense emphasis on deposit gathering. Too often banks emphasize low-margin loans and fail to get the deposits required to compensate for them.
* Culture. The core of Commerce’s culture rests on the foundation of providing excellent customer service. As it was entering the New York market, the Citi’s and Chase’s of the world provided Commerce with a significant market opening. The service they provided was mediocre; employees showed only intermittent interest in serving customer needs; finding new ways of charging fees seemed to be their raison d’etre. As the bank has grown, its strong culture has remained intact due to hiring practices and the bank’s Commerce University which all new employees attend.
* Consistency. To an outsider, Commerce branches appear to operate as well-oiled machines. For many bank customers their banking experience depends to a large extent on the individual teller or banking officer. Commerce aims to provide uniform service across its footprint.
* Contrarian. In Hill’s words: “The typical big bank model is relatively high cost of money, relatively low cost to run, and no growth. Our model is relatively low cost of money, relatively high cost to run, and high growth.” Its low cost of money results from the bank’s ability to attract DDAs and lower-cost deposits while its relative high cost to run results from the location and quality of the branches it builds as well as its late night and weekend operating hours. Its historically high growth rates come from its ability to take share from other players, retain customers, and pay less for deposits due to the high service levels it provides.
Appropriately, analysts have stated that the bank cannot continue to thrive with an operating expense percentage above 70. However, management has the opportunity to reduce a meaningful portion of those expenses without harming its core culture.
* Customers as fans. Many customers really like the Commerce experience. They maytolerate or express satisfaction with the experience at most banks, but they like and recommend Commerce. That is all too rare, even for employees.
How have they managed to make what is often an onerous task into an enjoyable one? Commerce demonstrates respect for its customers and does so consistently.
The Future
Despite a more difficult interest rate environment, the basic Commerce franchise continues to be highly attractive. However, any acquirer needs to be mindful of Commerce’s uniqueness. If history serves as a guide, merging a bank like this into a larger bank will likely destroy that uniqueness and quickly erode the customer loyalty that has taken years to develop.
But can it remain an independent growth machine without its founder? Time will tell, but who knows or cares who the owner of a Burger King is? Or a Starbucks? Or a bank, if the positive experience that attracted you to that bank continues intact.