The conventional wisdom that gripped the banking industry for the past decade is being upended. Not too long ago, the future of banking was thought to be personal computers, the Internet, ATMs, kiosks—everything but expensive branches. But now bank branches are sprouting up all over the Northeast—more than 200 new ones in New York City in the past two years alone. And for this boomlet, we should thank Commerce Bancorp, the upside-down bank.
Founded in 1973, "America's Most Convenient Bank" flouts the rules of modern banking. Based in Cherry Hill, N.J., Commerce grows by building and spending, not by acquiring and slashing costs. For years, it has been seeding the terrain between Philadelphia and New York with branches (or, as it likes to call them, "stores). It finished 2004 with 319 stores. (Here's a map of its locations.) Its plans for 2005 include 55 new stores, 1,800 new jobs, and expansion into Washington, D.C., Connecticut, and Pennsylvania's Lehigh Valley.
Commerce isn't a bank, it's a "growth retailer," as Vernon W. Hill, the bank's founder and chairman puts it. Hill, who started out helping McDonald's site restaurants in New Jersey, is a combination of gonzo electronic retailer Crazy Eddie and Citigroup architect Walter Wriston. Under Hill, Commerce behaves less like a bank than like, well, a store. Commerce branches are open on Sundays. They offer free coin-counting service.Last September, Commerce announced it would keep two branches in New York open till midnight on Fridays. The day after Thanksgiving, Commerce opened all its branches at 6 a.m.
Hill is intent on putting some fun back into banking. When a Commerce branch opens, a mascot—an out-of-work actor dressed as a giant red C—hands out free pens! And the branches are more Prada than Wal-Mart. While most banks spend about $1 million to open utilitarian branches, Commerce drops more than $3 million outfitting each store in wood paneling, marble floors, and granite counters. Just another part of what Hill likes to call Commerce's "unique brand of WOW!"
Here is what Commerce doesn't do: make you lots of money. While rival banks try to rope in customers with interest rates that are a few basis points higher than those offered by the bank around the corner, Commerce intentionally lowballs its customers. As James Grant of Grant's Interest Rate Observer noted in a critical look at Commerce last week, "in 2004, depositors earned, on average, a grand total of .98 percent." A quick check of the 12-month CD rates at six banks near my office this morning showed that Commerce offered the lowest rate of the group, 2.25 percent. Customers are flocking to Commerce despite the meager rates.
So what's not to like? Plenty, if you're a competitor. Commerce is forcing established banks like Chase and Citigroup, long accustomed to dealing with customers on their terms, to do things like remain open on weekends and invest in branch networks. There's a little jealousy at work here, too. Commerce Bancorp sports a higher price-to-earnings ratio and pays a smaller dividend than most other banks, and its earnings have continued to impress in a period of rising interest rates.
Rivals are also put off by the style that can sound too 1990s for comfort—the relentless promotionalism and hucksterism, the promise to revolutionize the industry, the costs-be-damned attitude. What's more, Commerce hasn't exactly been a shining example of corporate governance's best practices. According to the 2004 proxy statement, Commerce in 2003 paid $1.1 million to lease land on which 17 branches sit from entities that Vernon Hill partly owns. It paid more than $10 million to a company controlled by Hill's wife to help design and manage the construction of branches. And it spent $448,000 at a golf club of which Vernon Hill is a principal owner. Last June, two Commerce Bancorp executives were indicted on charges they steered loans to former Philadelphia Treasurer Corey Kemp in exchange for city banking business.
But other bankers are also flummoxed by Commerce in part because it has tapped into something with which they are unfamiliar: passion. People are passionate about their beer and soda, their coffee and fast food, their cars and clothes, and their hairdressers and gyms. But banks? Nah. Bankers think in terms of basis points, not buzz. They've been schooled to believe that customers are motivated to cross the street by the prospect of earning a few more pennies on every dollar.
But most people aren't interest-seeking robots. Customers at all kinds of stores constantly trade off price for value, pennies for convenience. And if you're the sort of person who might want to cash a check at 10 p.m. on Friday or bring in your kid on Sunday to count up the pennies in her piggy bank, then banking with Commerce is eminently rational—even if the interest rates are crummy.