The Demise of the Small American Bank

from the Wall Street Journal

You might call Vernon Hill a reverse Paul Revere. Most Americans like to believe that the U.S. is still a land of opportunity, the place where anyone can start a business and make a profit. But Mr. Hill issues a warning that rings loud and clear: The British—and others—are more inviting than we are.

“The regulatory environment has become so onerous in America that it is now easier to start a business in England than in the U.S.,” Mr. Hill says—and he would know.

In 1973 and only 27 years old, Mr. Hill founded Commerce Bank with one branch in Marlton, N.J. The fledgling company focused on customer service and called itself “America’s most convenient bank.” By the time Mr. Hill left Commerce Bancorp 34 years later, only months before the company announced it would be bought by TD Bank for $8.5 billion, he had grown the business to some 460 branches, with 14,000 employees and combined deposits of about $40 billion.

Now he’s replicating that model in the United Kingdom with Metro Bank, which he founded in 2010. And Mr. Hill says there’s an ocean of difference between doing business in the overregulated U.S. and in the U.K. “When I went to Britain I thought the regulatory environment would be much worse,” he says. “It’s infinitely better there.”

The problem in the U.S. starts with towering federal regulations, such as the voluminous reporting and compliance rules in Dodd-Frank, the financial reform act that recently celebrated its fifth birthday. “Regulators are making it impossible for the medium and small banks to comply with the rules,” he says. “The burdens get so intense that it is destroying the small and medium-size banks in America.”

The result is that Dodd-Frank, a law intended to take on the systemic risk of “too-big-to-fail” banks, is multiplying the problem. “The big banks that are too big to fail are bigger now than ever, but the regulations have trickled down to the smaller banks that didn’t cause the financial crisis” Mr. Hill says. As a result, community banks are disappearing. “When I started my first bank in the 1970s there were 24,000 banks in America,” he says. “There are now 7,000 banks. It may soon be 500 or even fewer.”

But it’s more than Dodd-Frank that leaves him frustrated. “The feds have taken anti-money-laundering rules to the extreme,” Mr. Hill says. “We have to monitor every deposit account every 24 hours. Somebody’s monitoring your account every day.” That’s invasive and expensive.

He laments that the Community Reinvestment Act, a catalyst of the 2008 subprime mortgage crisis, still hasn’t been repealed. “We are literally required to make loans that we know are going to fail,” he says.

Then there’s the tangle of local regulations that every American small business must cut through. “You don’t need a building permit in Britain. Here [the U.S.] you have to get permits and you have to get inspections,” he says. All that can eat up months and months. “I can build 100 branch banks in Britain before I can get one built in the U.S., thanks to regulators.”

Policy makers and economists in Washington fret about what’s slowing the rate of business startups and entrepreneurial ventures. But Mr. Hill says it’s no wonder, with all this red tape, and it’s no accident that the industry that is really booming, technology, is the one least regulated by government—though the assault against Uber suggests that Silicon Valley might not be immune for long.

Now 69 years old, Mr. Hill hasn’t lost any of his verve. Tall and dapper in a double-breasted suit, he is flamboyant and opinionated, and some might call him a publicity hound. He speaks with a noticeable stutter and I ask him whether this has held him back over his career. “What do you think?” he replies. He was once described as “the best damn banker” in America, and though that might be a stretch, it’s true enough that he has turned small banks into multibillion-dollar profit centers.

Mr. Hill grew up outside Washington, D.C., and attended business school at Wharton in Philadelphia, where our interview took place. During college he worked as the primary loan officer at a bank in New Jersey. “The joke was if you wanted a loan from this bank you couldn’t get it until the afternoon,” he says, “because I hadn’t gotten back from school yet.”

After graduation he got the idea of putting a retail spin on the banking business. He gathered investors to raise the $1.5 million he needed for a state bank charter. Commerce Bank sprouted from one office with nine employees but “no capital, no customers and no brand,” he says. His strategy was to “borrow the best practices of the great retailers,” adding that he learned the value of volume by watching Ray Kroc make money selling McDonald’s hamburgers for 15 cents apiece.

Most branches were open seven days a week and for extended evening hours, sometimes as late as midnight. Commerce did its best to make banking fun: Employees wore red, the company’s color, on Fridays, and a walking mascot of the letter C from the Commerce Bank logo wandered around taking pictures with clients. The idea was to turn customers into fans, who would stay loyal and recruit their friends. Mr. Hill even wrote a book in 2012 titled “Fans Not Customers: How to create growth companies in a no growth world.”

By 2007 Commerce was the 18th largest bank in North America. The previous year Mr. Hill was named to Forbes magazine’s elite 20-20-20 Club, a short list of CEOs who over 20 years had led a public firm to at least 20% average annual return in share price. Others on the list were Warren Buffett and Larry Ellison.

Mr. Hill says that when the company was sold, he personally made $400 million. “I was cash rich,” he says, “but had nothing to do.”

Then a close friend from Britain urged him to take a gander across the pond. Mr. Hill did and says he discovered that there were only five big stodgy banks operating in Britain. “They were worse run than even the American banks,” he says. “They treated the customers like they should feel lucky to have a deposit there.” For instance, their hours of operation generally ran from 9 a.m. until 2 p.m.

No new retail bank had opened in Britain in more than a century. But Mr. Hill quickly raised $100 million of private capital in the U.S. and started Metro Bank. He adopted his American model of creating a customer-first experience. “Everything we did in New York we do in London,” he says. “And everything we did in New York works better in London than it did in New York.”

Mr. Hill doesn’t believe that most depositors shop around and choose a bank based on price—say, the interest rate offered on a savings account. Convenience and service matter. Metro Banks are open seven days a week, mostly 8 a.m. to 8 p.m. The big banks have moved away from offering safe-deposit boxes—Barclays justified a phaseout in 2013 by saying they were too “complex and costly”—so Metro has swarmed in to take over that business, which Mr. Hill describes as a moneymaking machine.

Branding matters, too. “You don’t buy an Apple phone because it’s cheap,” Mr. Hill says. “You buy it because you’re buying the Apple world. So that’s what we learned to deliver. We made it a fun experience to go to the bank.” He held grandiose openings with clowns and balloons. They made the bank branches kid friendly and gave dog treats to visiting canines. “In Britain the customer thinks if you love my dog you must love me,” Mr. Hill says.

He’s obsessed with a statistic called “net promote”—the percent of current customers that would recommend the bank to friends—which he insists is the best way to measure brand value. “We’re number one in Britain today in brand loyalty,” Mr. Hill says. “We’re not some boring, unsexy bank.”

Metro Bank now has 36 branches, with a new one opening about every month, and its market value has reached $1.6 billion, multiple times the original investment. The company is expected to go public on the London Stock Exchange next year—and it seems likely that once again Vernon Hill’s investors will enjoy a supersize payday.

New quarterly financial statements were announced July 23. Deposits are up more than 90% year over year, and Metro Bank has passed the $5 billion mark with 500,000 customers.‎His goal is to grow fivefold over the next five years, which would mean more than 150 locations and $25 billion in deposits and other assets.

Which brings him back to America’s policy debates, the hangover from the 2008 financial panic and Dodd-Frank. What to do with banks that are too big to fail? Mr. Hill doesn’t hesitate. “You have to make them smaller,” he says. “You break them up.” He says that at one point there was a rule that barred any one bank from holding more than 10% of the country’s deposits, but that some institutions, such as Bank of America, have now edged above that figure. He views that as dangerous.

And how much should we be worried about overregulation—or competition from abroad? “Here’s my story in a nutshell and I hope Washington is paying close attention,” Mr. Hill says. “A very successful American business model has been transferred to Britain, where it’s even more successful because it doesn’t have to deal with the same burdens of government.”

He continues: “The politicians keep talking about fairness and helping the little guy. But it’s the little startup businesses that get hurt the most from the heavy hand of excessive government regulation. How is that fair?”