The Burger King of Banking

May 10th, 2017

You might remember Vernon Hill II as the flamboyant banker with the retailer’s touch who turned Cherry Hill, New Jersey-based Commerce Bancorp into one of the nation’s fastest-growing and most profitable banks of the ‘90s and early ‘00s.

Commerce mimicked retailers with prompt, high-touch customer service and airy “stores” in high volume locations. It kept them open longer than competitors and equipped them with free coin counting machines, lollipops for the kids and an open door policy for Fido, complete with biscuits.

All we did was to bring Retailing 101 ideas to banking,” says Hill, 71, who earlier in his career was a Burger King franchisee. “The goal was to create a fun retail environment—an experience that turned customers into fans.”

After launching a successful bank in London using the old Commerce formula, Hill—no less outspoken than he was back then—has formally come home again. In December, he was named chairman of $2 billion asset Republic First Bancorp in Philadelphia, intent on employing a strategy that echoes his past successes at Commerce, while also giving a nod to an increasingly mobile-driven future.

Among his top priorities is boosting Republic’s branch count, from today’s 20 to as many as 75 in the next five years, and infusing those outlets with the same customer-friendly amenities that made Commerce a powerhouse brand a decade ago.

We are absolutely recreating the Commerce franchise,” says Harry Madonna, Republic’s founder and CEO. “It’s worked two times before. Why wouldn’t it work again?”

In a world increasingly defined by bits and bytes, it’s tempting to dismiss Hill’s latest effort as an outdated relic, out-of-touch with today’s digital reality. The world, we’re told, is headed toward a mobile, social-media-driven future where everyone will bank on their phones and avoid contact with people.

Even the biggest banks that owe their top-of-the-heap status to the ubiquity of their branch networks are scaling things back. Bank of America Corp., for example, has slashed its branch count from more than 6,100 in 2010 to 4,700 as of June 2016, according to Federal Deposit Insurance Corp. figures. Wells Fargo & Co. and JPMorgan Chase & Co. have pared hundreds each.

Gerard du Toit, a partner in Bain & Co.’s financial services practice, gives Hill credit for the “spirit of customer-centricity” in his approach, but says “there’s no evidence that anchoring your strategy around the branch is an effective differentiator today.” The firm estimates U.S. banks would save $11 billion per year merely by reducing branch density from 32 branches per 100,000 adults to Europe’s average of 24.

Hill says such talk is fine for run-of-the-mill, look-alike banks, but does little to inspire the imagination, or growth. “This is the third time the branch has died,” he says. “First ATMs were going to kill the branch, then the internet was going to do it, and now it’s mobile.

“But remember, banks are in the new account opening business—you’ve got to get people to switch to you—and very few people want to open accounts on the internet or mobile,” he adds. “To open new accounts, you need a physical presence.”

Bankers ignore Hill’s message at their own peril. At Commerce, the branch-centered “experience” generated an emotional connection with customers, word-of-mouth buzz and growth: At its peak, Commerce added nearly $20 million in deposits per branch, per year, compared to an industry average south of $2 million.

By the time regulators forced Hill’s ouster in 2007, partly for hiring his wife’s architecture firm to design those branches and for owning a real estate firm that leased them to the bank, Commerce was a $48 billion asset juggernaut. Hill departed with a nice payday when Canada’s TD Bank paid $8.5 billion for Commerce later that year.

In 2010, he launched Metro Bank, the first new London High Street bank in 150 years. Metro has leveraged the Commerce strategy in one of the world’s priciest real estate markets to steal 1 million customers and $10 billion in deposits from the U.K.’s bigger, stodgier rivals.

“Everything we did with delivery in America works even better in Britain—locations, stores, hours, dogs,” Hill says. “People view us as a retailer that happens to be a bank.”

Madonna says things have gone just as well, if not better, at Republic, a 29-year-old bank that was just another “me-too bank that didn’t worry too much about branches” until Hill signed on as a consultant in 2008.

The board, which had admired Commerce as a competitor, embraced both Hill’s vision and culture. A whopping 90 percent of Republic’s staff used to work for Commerce, including most of the top brass. Many locations are open as late as 8 p.m., and on Saturday and Sunday. Customers get access to a network of 55,000 ATMs, free of surcharges.

Republic employs Commerce’s old color scheme—the marketing message is “the power of red is back”—and is employing essentially the same branch-based, customer-centric strategy to win business. Just like Commerce a decade ago, Republic’s ad campaign features Hill, his wife and his Yorkshire terrier, Duffy.

“It’s almost like a cult following,” Madonna says.

The new stores—bright, 3,500-square-foot glass palaces, set up on Commerce’s old turf—are growing deposits by $30 million per branch, per year. He says a surprising number of new customers are millennials and marvels at the buzz around a recent store opening.

“When I got there at 7:30 in the morning, there was a line waiting to get in. The police were out there directing traffic. It was like the opening of a McDonald’s,” Madonna says. “It sounds counterintuitive, because everybody is saying the branch is dead. But we’re building them and they’re growing at astonishing rates.

“A lot of bank boards would never buy into it,” he adds, “because you have to spend money on branches and people to do it right, and they’re too worried about costs.”

It would be too simplistic to say Hill’s strategy is merely about the branch. At its core, banking is a zero-sum battle for core deposits, he says. To grow significantly, you need to steal customers from competitors. And to do that, you need to differentiate your bank from rivals and create “fans” that are loyal to the brand and willing to evangelize it to others.

The store, where a bank can truly set the tone—and where 70 percent of all deposit accounts are still opened—remains best positioned to be the centerpiece of that broader effort for most consumers.

“Our basic theory is that the value of the bank lies in its core deposit base,” Hill says. “Your first goal has to be to get people to switch to you. If you’re not opening new accounts, you’re not building the business.”

All that’s not to say Hill is hiding his head in the sand when it comes to the rise of digital. He says mobile is “an important channel” which must be supported, but not necessarily the end of banking as we know it.

In a nod to Amazon-inspired changes in retailing, Hill’s model is now Apple instead of Nordstrom. “Nobody buys an iPhone 7 because it’s cheap. They buy it to be part of the Apple world,” he says. “With Apple, you’re part of a unified delivery experience no matter what channel you choose. … That’s what we want to achieve.”

Frank Schiraldi, an analyst who follows Republic for Sandler O’Neill + Partners, says Republic’s growth numbers show promise. While returns are lower than industry averages during this ramp-up phase, assets and deposits both grew 34 percent last year. Republic’s share price has nearly doubled since Hill became chairman.

“Obviously, it’s a different environment today [compared to a decade ago], but the math works,” Schiraldi says. “If you generate enough low cost core deposits, your branches can be profitable regardless of how much you spend on them.”

John R. Engen is a freelance writer and a contributor to Bank Director magazine.