Banking, Retail-Style

In demeanor, Hill is reminiscent of builders of growth stock companies like Best Buy’s Richard Schulze and Home Depot’s Bernard Marcus. He talks in pithy declarations — “We think we’re in the retailing business, not the banking business” — and has a book coming out in October: “Fans, Not Customers.”

Banking wasn’t Hill’s first choice. He worked for one while studying at Wharton and didn’t see it as the path to riches. Instead, he went into real estate and developed sites for McDonald’s in the 1960s and 1970s. He says he founded Commerce in 1973 as “sort of a lark.” Fast-food expansion and service — he’s also a Burger King franchisee — influenced his thinking at Commerce. “Bankers believe the value is in making loans. We believe the value is in gathering deposits. That is a major differentiator,’’ he says. “Because of that we took the route, ‘Let’s give our customers this great retailing experience,’ and it all evolved from those simple ideas.” By customers he doesn’t mean just consumers — 58% of Commerce’s core deposits are in business or government accounts.

There’s a tradeoff for customers for the convenience and break on some fees; they don’t earn top rates on deposits. Hill has found that customers are happy to make that exchange. Because Commerce pays less for deposits, it can afford to spend more on sites like the one in Boynton Beach — and on staffing them. Hill says his locations usually cost $5 million for the land and building, but Commerce’s average branch accumulates $120 million in deposits, which is well above the industry standard. Because banks’ gross profit is generally 5% of deposits, he says, that translates into a $6-million gross profit for each Commerce branch, which, he says, is more than double the industry average.

“Bankers generally have given up on growth.
Florida is a little different, but across America, they’ve given up on growth.”

What’s more, deposits at the average Commerce branch grew $19 million last year, which, Hill says, is more than six times the industry standard. Says Hill, “In many ways, our model is the anti-bank model. The typical big bank model is relatively high cost of money, relatively low cost to run, no growth. Our model is lower cost of money, higher cost to run and very high growth.”

The higher cost to run — the long operating hours, extra staff and higher overhead in general — makes Commerce less efficient than the industry average. Its return on assets and return on earnings are subpar as well. And like other banks, Commerce is struggling with the yield curve. Profits grew only 6% last year, compared to 41% in 2004. But unlike most of its peers, it’s a growth company. “Bankers generally have given up on growth. Florida is a little different, but across America, they’ve given up on growth,” Hill says. “So if you can’t grow, you cost-save your way to prosperity. And if you can’t cost-save your way to prosperity, you sell to somebody else who tries to cost-save more. We reject all that.”

Tags: North Central, Banking & Finance