Rewriting the rule book

Exclusive: Vernon Hill shares the secret behind Commerce Bank’s success – write your own agenda, and stick to it!

Up close and personal
Vernon Hill share’s the secret behind Commerce Bank’s success, underscoring the value of the customer-bank relationship.

By Jonathon Edgley
In what has proved to be a very busy couple of months in the editorial calendar, I have taken time to reflect and feel quite guilty in questioning my seemingly ever-increasing workload. Why? Well, I managed to speak with Vernon Hill, Chairman of Commerce Bank (although I feel he won’t need any introduction) who I wouldn’t be afraid to wager is one of the hardest working men in banking, or any other business vertical you care to think of.

It’s no secret, as the numerous articles written about him will attest, that since 1973 Hill has built up an empire quite literally brick by brick (or perhaps that should be person by person, as Commerce Bank is a company that started with only nine staff members and now has 13,000) to become one of the most talked about banks in America, and he himself one of the sectors most controversial characters.

I hope to reveal a bit more about the “Robin Hood” of banking.

Back in the day
Initially, it was Hill’s father who persuaded him to go into banking: “My father, who worked before the war as a bank clerk, wanted one of his sons to go into the industry. He pushed me to go to the Wharton School to take banking and I also worked in some banks before and during college. I left college in 1967/68 and I set up Commerce Bank from scratch in 1973.” Simple really, and in fact no different to many starting off on the road into finance. It’s not a romantic rags to riches beginning, just one of hard work and dedication.

What has happened subsequently, however, is perhaps the stuff of dreams, and even beyond Hill’s original aspirations: “We never thought we’d get to this size, we never thought we would be successful in Manhattan. Our initial capital was US$1.5 million, today our market cap is US$7 billion. We’ve gone from basically zero to US$43 billion in assets and all of it has been done without acquiring anyone along the way.” Quite amazing figures, but even more impressive, and perhaps the real crux of what Hill started, is the Commerce model. It is completely different from almost any other US bank model and has been achieved by building branches one at a time and growing those branches. “It’s much more like a retailing concept than it is a bank,” Hill asserts.

So what is the much discussed, and often maligned, Commerce model? “Our basic style is decentralized delivery, centralized control of the model,” says Hill. It is a style that has been allowed to flourish because a company that started with nine people and now has 13,000 has the advantage of growing internally, in a way it wants.

“The typical big banks in American are run by what we call lines of business. We don’t believe in that. We run geographic models, we have 10 people with people below them who deliver all of our products and services in the marketplace. It’s like we’ve taken our model and broken it up into 10 large segments, and then broken these down into smaller segments so we can deliver a local bank feel in the multiple market.”

It is also a model that has rolled with the punches and developed over the years, as it just isn’t possible to grow on this scale without adapting. “What I’ve learnt all these years is, as you reach certain size levels, your management style, both the company as a whole and as an individual, has to change – the companies that don’t change at these points stop growing or get sold – so certainly I have to do things much differently now than I used to years ago.” For instance, when the bank started, Hill used to approve every single loan – and I mean every single loan – but now he only approves the largest credits: “You have to give up the pennant and empower people to make credits.” This has turned into a major facet of Hill’s management style: “I think the company and I learned how to deliver this model on a larger scale by empowering people to execute the model. We empower people, we give them lots of responsibility and freedom, but we expect them to produce.”

The successful ethos
But with such growth, the bank has to work hard to maintain its brand and keep its original appeal? “We have to work on it every day and I believe there are really three parts to make any great company.

“First of all, you have to have a model that’s different to the competition. It should be very clear so the customer sees real value. Around the model you have to build a pervasive corporate culture that matches the model. You can’t have a culture and model that are opposite or they work against each other.

“So you’ve got to have a differentiated model, pervasive and very clear culture and then you have to fanatically execute the model, you have to be committed to your model and you have to execute it everyday. If you get these three things right, and it’s a never-ending battle, and keep them right, you become a company that stands apart, delivers different results and one that customers becomes attached to.”

Asked to sum up exactly what the Commerce ethos is, Hill says: “We believe the value of an American bank is in the core deposit base, not on the asset or the loan side but in the core deposit base. We believe that customers will bank with you not for the highest rate but for the best services. Our entire model is about growing high growth in low-cost core deposits, driven by a unique differentiated service experience.”

And it is this uniquely different service experience that seems to hitting all the rights notes with the American consumer: “They don’t have to have the highest rates and they don’t have to buy at the lowest price. They care much more about their relationship and service experience.

“That has driven us to do all the things that we do and created this growth machine and bond we have with our customers – they become our fans. That’s really our goal; to make customers our fans.”

When I then doubt whether it’s possible to continue to innovate, I should really have known the answer, he’s been doing it for over 20 years and has no intention of stopping: “Not only is it possible, it’s required. Customers of great firms expect their experience to get better. Once we decide this is as good as we can get, our growth rates will slow. We have to make it better all the time. We have to enhance the experience. We have to make even more fans so we are always doing things to make it better.”

Just accept it
One thing I’ve noticed in researching Commerce is that nearly every article you read questions and often criticizes the Commerce approach – an approach that’s had success now for more than 20 years! I ask whether he’s fed up with the constant questioning and criticism and, although the question garners a laugh, he replies with a resigned tone that seems to accept that this isn’t going to change: “We’re the agent of change in the banking business. We pretty much take the reverse side of most of the conventional ways of the business so we’re just used to people saying this model won’t work or we can’t continue. However, I do agree that it’s very hard to convert a normal bank model to this model.”

And this is why he’s avoided the mergers and acquisitions route that has been so rife in the industry: “We believe this model is so dramatically different to everyone else out there that I don’t believe we can take a bank of normal size and convert it to this model.” And of course: “We also have such strong growth with our own model and building new stores, why take the risk or acquiring someone else.

“It’s hard to find a retailer in the US selling shoes, restaurants, whatever, that’s ever been built by doing a deal. If you go back to J C Penney’s they’ve all done it the same way. They’ve developed a unique model, refined the model and rolled it across America. Acquisitions dilute your model, dilute your structure and dilute your IT.”

It seems, therefore, that the way to understand Commerce is to look at it through a non-bank view of life. “Look at us as a Starbucks, Home Depot, someone who’s reinvented a product or service. The people who are skeptical about us are looking at us through normal banker eyes and it doesn’t make sense.”

If you can do that, then you can be excluded from the focus of his next comment: “As we take market share from the competition month after month, year after year, market after market you’d think they would get it but it doesn’t seem to happen.”

The legacy
When I ask what he wants his legacy to be, I was surprised by the reticence in the response, he genuinely didn’t have an answer. Some reports would have you believing that nothing less than world domination is satisfactory, but this certainly didn’t seem to be the case: “I think the legacy of Commerce is that this is a service business not a finance business and the company that delivers the best service experience wins.” Although he does concede that: “Our goal is to have a 100 percent market share in every market we serve and create wealth for our shareholders by taking market share,” that’s more like it!

I jump on this last comment to see how he defines success, is it wealth, is it beating the competition, or is it changing people’s way of thinking? “The answer to all of those is they’re all the same thing. We create wealth by growing the company, we grow the company by creating fans, and by creating fans we take market share away – all those parts are linked together.”

And so to my last and most irreverent question, what’s with the Genghis Khan moniker? “Some reporter wrote that years ago, and I guess it’s in the context of what I’ve been saying to you; we’re about taking market share away, we’re not about making friends in the banking business.” I get the feeling this isn’t something he appreciates, however, especially as Commerce has become a leader in civic giving. In fact, it’s corporate giving program has contributed more than US$48 million – over 6000 separate contributions – US$10 million of which was given in 2005 alone. I therefore suggest that where Genghis Khan was once used, now read Robin Hood’ “That’s the way to put it,” Hill concludes.