'British banks just don't understand customers'

Vernon Hill’s Metro Bank has made its mark in Britain, even if it has yet to make a profit. With an approach to customer relationships that owes more to Steve Jobs than his industry rivals, he’s ready to break the mould

Vernon Hill is quietly confident that Metro will finally be in the black by the end of this year (Rex)

Southend-on Sea, though it offers a certain glamour, is not where one would typically expect to find a well-heeled and urbane banker on a cold spring day.

But then Vernon Hill, the chairman and founder of Metro Bank, is not a typical banker. The son of a Virginia real estate broker, Mr Hill developed his interest in the industry during his business school studies in Pennsylvania 50 years ago, where he combined his classes with part-time work for a car dealer who also ran a local banking operation.

The entrepreneurial approach of his first boss, whose bank’s opening hours mimicked those of his car dealership, continues to inspire Mr Hill. And since launching Metro in the UK five years ago, he has been spending two weeks of most months in London overseeing its expansion across the South-East. The day trip to Southend is to open the 31st branch of the business.

“I visit and approve every single site before we open,” Mr Hill says, dismissing suggestions that this might be the first time he’s been to the town. “It’s more gut than science, but we do look for some very specific things.”

Those things turn out to be location, location and location. Metro favours areas with a relatively affluent demographic and it looks for corner plots on well-trodden high streets that offer easy access for both retail and commercial customers. In an ideal world, Mr Hill would like a two-storey building because Metro designs its branches in identikit fashion – with a glass facade and a double-height entrance hall to ensure the interiors are light and airy. That’s all the better for customers to see Mr Hill’s bold colour scheme and open counters – you won’t find staff serving from behind a screen – and for his staff to perfect their warm welcomes.

The style has not developed by accident. It is more or less a carbon copy of the design scheme that Mr Hill put in place at Commerce Bank, where he made his name. Mr Hill launched Commerce himself in 1973 and had turned it into one of the largest banks in the US by 2007, when he walked away. As he points out, Forbes magazine credited him as being one of just seven US chief executives to have stayed in the post for 20 years and delivered annualised returns of at least 20 per cent to his investors – though he rather ruefully adds that one Warren Buffett is a single place ahead of him in the ranking.

In truth, however, Mr Hill can’t claim all the credit. Commerce Bank’s design-oriented approach – subsequently adopted by Metro – was in large part the work of his wife Shirley, whose own firm specialises in the confluence of architecture and branding. She continues to micro-manage the look and feel of Metro’s growing network of branches.

Just don’t let the Hills catch you using the word “branches” because Metro has “stores”.

“We are a retailer that just happens to sell banking services,” Mr Hill explains. “And like all good retailers, we understand that stores, location, look and feel are absolutely integral to how you build a brand.”

His role model in this philosophy is Apple under Steve Jobs – a business that excelled in establishing a relationship with its customers.

“You don’t buy an iPhone just because it’s a great phone, but because a million other little things make Apple special,” Mr Hill insists.

By contrast, he argues, Britain’s banks are a million miles away from understanding their customers. “Their mentality is all about a product-selling chain,” he says wearily of banks that have built a base of current account provision and then used it to sell all sorts of other services. Some have been less good value than others – payment protection insurance, for example.

What does Mr Hill’s customer-centric model mean in practice? For consumer banking, it entails seven-day store openings with typical retailers’ hours, instant account opening, call centres where human beings answer the phone, and a host of other little touches – Mr Hill says allowing customers to bring dogs into Metro has been a hugely valuable differentiator.

Again, these are ideas that Mr Hill has imported from his Commerce Bank days. “There’s only one change I’ve had to make,” he says. “For some reason, British customers seem to like to queue in the cold and the rain. They didn’t like the fact all our ATMs were inside our branches, where it’s dry and warm, so we’ve had to install some in the street too.”

For business customers, meanwhile, Mr Hill says: “We have brought back the old-fashioned commercial bank, with local relationship managers who can make lending decisions for themselves based on their instincts about the company.”

He believes the bigger banks have lost interest in small business customers, whatever they may claim to the contrary in public.

The figures suggest that Metro’s pitch is attractive. The bank has now opened almost 450,000 customer accounts and last year deposits more than doubled to £2.9bn, from £1.3bn at the end of 2013. Lending to business and personal customers doubled too, reaching £1.6bn by the end of 2014, from £754m a year previously.

For all this growth, however, Metro is still to prove itself on the one metric that really matters to many analysts: it has yet to break into profit. In the final quarter of last year, the bank lost £8.9m, only a marginal improvement on the £9.4m of losses racked up in the previous three months.

Mr Hill is quietly confident that Metro will finally be in the black by the end of this year, but he insists his investors are not grumbling. “We have made a conscious choice,” he says. “We could have been profitable by now but we were determined to invest in the business and its brand; profit is not the only yardstick by which to judge a business.”

Nevertheless, Metro’s five years of losses underline the difficulties confronting new entrants to the UK’s retail banking market. The industry’s operating model, grounded in the seemingly unbreakable covenant of free consumer banking, only delivers profitability with scale and maturity, which requires patience and deep pockets among the challenger banks.

Despite rival banks’ grumblings about the increasing regulatory burden, this is not where the problem lies, says Mr Hill. In fact, he describes the UK regulatory regime as “way better than in America” and is full of praise for the “supportive” attitude that Metro has encountered.

The truth, he says, is that “opening a new bank is incredibly hard”, even with the political goodwill for new entrants to the banking sector amid the continuing fallout from the financial crisis.

In fact, while there is undoubtedly an appetite for greater innovation and competition, Metro is the only brand new, full-service retail bank to have opened its doors since the crisis. Other new names either concentrate on small niches – the likes of Aldermore and Shawbrook in small business banking, for example – or are rebranded or restructured incumbents, such as TSB, carved out of Lloyds last year.

Nor, argues Mr Hill, has the supposedly disruptive influence of online competition really been felt in retail banking. “The online-only banking model simply doesn’t work,” he argues. “The problem is that while you’re spending a fortune on marketing to build the brand, your only means of competitive differentiation is rate.”

The numbers don’t add up, he adds – an argument that is reinforced by the chastening experience of Egg, the one truly internet-only bank launched in the UK so far, which burned brightly before being broken up and sold off.

In fact, Mr Hill argues, customers want an all-singing, all-dancing service from their banks, even if they only use branch-based services occasionally.

Metro, however, is built on Mr Hill’s belief that if it can transform the customer experience of banking, more business will follow. “If you want to build a great brand, you need to make the experience better as you grow. Don’t compare us to other banks; compare us to Apple.”

That’s quite an ambition, especially for a business that has no plans in the short term to expand beyond the south-east of England (although Mr Hill points out that this gives him a market of 18 million people to aim at). And as Metro grows bigger, it will have to prove it can continue to innovate and to offer the personal touch.

Mr Hill himself turns 70 this year, but shows no sign of stepping back. Nor is he lacking in self-belief. “This is the fifth time I’ve started from scratch,” he said. “Each time people told me it would be difficult, but I found it was when I stopped listening to them that growth really took off.”