Building the Great Retail Bank: Who’s Doing It Right?

Quite a few banks, actually, are doing retail banking right today. Many are now debunking the conventional wisdom that, until recently, governed the way most community banks operated, that is, rarely outpacing the population growth of the communities they serve.

We’re especially impressed with these: Washington Mutual out of the West, Commerce Bank in New Jersey, Oregon’s Umpqua Bank, and Fifth Third in the Midwest. These are the banks that are showing that double-digit growth is possible, even in communities that seem saturated with banks, even in geographic areas of modest growth.

But first, allow us to offer a lifetime achievement award to Bank of America. No, not that Bank of America, that renamed and reborn Hugh McColl-designed NationsBank, though no one can say it’s doing so badly these days. Instead, we’re giving a lot of credit for the new winners, to that old winner, San Francisco-based Bank of America.

To the extent any one person is responsible for the face of American banking, it is A.P. Giannini who, in 1904, founded the Bank of America in the North Beach section of San Francisco. Giannini knocked on the doors of recent immigrants, many of whom had arrived on our shores with little more than the clothes they wore, and painted the vision of a bank that could make their lives better. In so doing, Giannini’s Bank of America laid the foundation for a banking system that helped working-class Americans buy into the American dream.

Bank of America grew and grew to encompass a branching system of nearly 2,000 locations, with activities that ranged from helping communities build water systems to growing the agribusiness industry throughout the West. Giannini was a smart, canny banker who always had an eye on the bottom line, but in a very real sense, he established a link between banking and the manifest destiny of the nation. The loyalty and goodwill that started with Giannini was strong enough that, a century later, when the question was whether to market under the NationsBank name or that of Bank of America, focus groups and sophisticated survey techniques made it abundantly clear which name and image was more positive.

Bankers who came after Giannini, and the banks they led, didn’t always measure up. In recent years, especially, banks pursued growth with an emphasis on the asset side of the ledger. The successful banks, or at least the aggressive ones, focused on building loans and on creatively, sometimes too creatively, coming up with new financial vehicles in which to invest. Customers were, in a sense, seen as assets to be mined for ever-greater fees even as they were provided decreasing levels of personal service.

In such an environment, deposits were a necessary evilu00e2u20ac”essential for funding loansu00e2u20ac”but for many banks, “deposit gathering” was a concept not yet ready for prime time. Attracting deposits meant competing for expensive time instruments, especially jumbo certificates of deposit, whose high yields bumped up against the yields available on loans.
Demand deposits hardly seemed more attractive, forcing a bank to compete for expensive-to-maintain customers, most of whom didn’t even use the bank’s other services.

A few banks did see the opportunities of building a large customer base. Citibank, under Walter Wriston and even more so under John Reed, made a conscious decision in the 1970s to build the largest customer base in the country via checking accounts, ATMs, credit cards, and a huge branching system, but, for the most part, Citibank was the exception.

Fast forward to the ’90s, an age of consolidation, with NationsBank, First Union, BankOne, Wells Fargo, and a handful of others vying for geographic dominance. The fortunes of banks ebbed and flowed with the wisdom of their investments. Are derivatives hot? Profits spike upward. Catch the dot-com wave? Your stock price soars. Then, when derivatives proved unexpectedly risky and dot-coms crashed and burned, profits plummeted, stocks crashed, heads rolled, and lending policies changed.

So what are we seeing now? From here, it looks like the outperforming banks are those whose focus is on relentlessly building their customer base. These are the banks that recognize the challenge of the new century is to build a deposit-gathering machine that can fund its investmentsu00e2u20ac”usually, but not always, loans to its customersu00e2u20ac”in a consistent and cost-effective manner.

If A.P. Giannini were alive today, we think he’d be doing something like these banks are doing.
Great branding is usually the result of great positioning, and Commerce Bancorp, based in Cherry Hill, New Jersey, has positioned its bank perfectly. When Chairman and President Vernon Hill addresses analysts, when he speaks to his employees, when he buttonholes a reporter whose story he doesn’t likeu00e2u20ac”all of which happen with some frequencyu00e2u20ac”he makes it clear how he sees Commerce Bank: Hill’s is a deposit-gathering model, pure and simple. He admits that this emphasis on core deposits as a value driver makes Commerce a totally different animal from the traditional bank. While it makes loans just like any other bank, Commerce Bank’s deposit-gathering ability has been so efficient that traditional lending policies could never keep up in generating high-quality, creditworthy loans. So the bank invests, far more than traditional banks, in nontraditional investments like mortgage-backed securities.

The other point Hill never forgets to make to his critics, and they are many, is this: “For 15-plus years we’ve provided the best financial performance in the market. How many more years do we have to prove the model?”
Vernon Hill is a great salesman for his bank. He’ll give you a bushelful of reasons Commerce Bank is successfulu00e2u20ac”its distinctive building, his extensive training and recognition system for employees, the 14,000 mystery shopper visits, its free coin counters, its free checking policyu00e2u20ac”but at the end of the day, one thing stands out: convenience. Vernon Hill believes in staying open seven days a week (yep, including Sunday) and he’s open until 8:00 p.m., when his competitors are home watching sitcoms. If that’s not convenient enough, note that Commerce Bank follows a companywide 10-minute rule, opening the bank 10 minutes before the appointed hour and staying open 10 minutes later than the published hours of operation.

And more than the convenience is the perception of convenience. Commerce Bank plays big. It’s like a 5u00c2u00b410u00c3u00bd point guard who plays a foot taller, by doing things that make the bank look a lot bigger than it is. Truth be known, the bank is spread pretty thin, operating as it does in New York, Pennsylvania, Delaware, and New Jersey, but with far fewer branches than might be expected by an ambitious player in those markets.

So how does Commerce Bank do it? By focusing all of its marketing on convenience. By always referring to its branches as “stores.” By making you remember the bank. You’ll remember its bright red letters against a white brick building, with floor-to-ceiling glass and a black roof that, if you’re not paying attention, might look more like a place to open up a package of French fries than to open up a checking account. Its fast-food profile is no accident, reflecting founder/CEO Hill’s early background as a real estate developer scoring McDonald’s sites, and later as the part owner of some 45 Burger King franchises. The bank even has a memorable mascot: Mr. C, a huge, white-gloved, red letter that smacks of Ronald You-Know-Who.

Memorable, too, is Commerce Bank’s advertising. Never has it worked so well as when Commerce Bank broke into the New York market with a series of convenience-based television spots featuring Seinfeld’s Julia Louis-Dreyfus, essentially reprising her Elaine role for the benefit of Commerce Bank. The smallish new Manhattan entrant looked more convenient and more customer-oriented than Citibank with its hundreds of New York branches. Only a big bank would be so audacious, right?

Play big. Be audacious. That kind of marketing, and that never-let-up emphasis on convenience, is responsible for a bank that has achieved 25% growth annually for the past five years and, for shareholders who have held the stock during its most rapid growth phase, a huge return. “The problem with most banks is that they abuse their customers every day,” says Hill. “We want to wow ours.”

Great businesses sometimes sprout up in unexpected places. Wal-Mart in Bentonville, Arkansas, for example. Caterpiller in Peoria, Illinois. Phillips Petroleum in Bartlesville, Oklahoma.

So it should surprise no one that some great banks are still getting their start far from the financial money centers of America. Beginning as a community bank in Roseburg, Oregon, Umpqua Bank is on many peoples’ short list of banks destined for greatness. No one would be less surprised than Ray Davis, Umpqua Bank’s CEO, at such grand predictions. “Our culture is the heart and soul of the bank,” says Davis. “It encourages others to say, ‘They’re different.’” Of course every proud banker thinks his or her organization is different, but not every bank CEO makes it possible for customers to “hit 8” on their dial pad and get to the president’s direct line. Davis does.

A tour around Umpqua’s branches, dubbed in 1996 as “stores,” is an experience. Many of its store managers aren’t bankers at all, but investment bankers, teachers, coachesu00e2u20ac”anyone smart enough to learn the business and people-oriented enough to want to manage a staff from a desk right out in the middle of things. The key word around Umpqua is “empowerment,” and it shows throughout the operation. When a record snowstorm hit Portland a couple of years ago, for instance, some store managers chose to stay open, some didn’t. Associates, as Umpqua employees are known, are directed to make decisions that are “in the best interest of the customer.” Empowerment extends to a hard-and-fast policy allowing any Umpqua associate to waive any fee if warrantedu00e2u20ac”no need to check with a supervisor. Very little is dictated from on high, an exception being that all associates are expected to be involved in the community through the bank’s “Connect Volunteer Network” program. It’s just part of the job, part of the culture, and no one is exempt from that. Just to be sure, Umpqua has an EVP of Cultural Enhancement, underlining the bank’s belief that maintaining its community bank roots as it grows to and through its regional stage is critical to the Umpqua success story.

Ray Davis doesn’t just believe in convenience, he believes in defining the bank with it. Call up Umpqua Bank and the receptionist chirps, “Thank you for calling the world’s greatest bank.” (Truth be known, I prefer a simple “Hello,” but I guess that’s just me.) Still, whether it’s a put-off for some or not, it etches indelibly in the mind that this is a great bank. Hear it enough and, sure enough, you start thinking of Umpqua Bank as, well, the greatest bank in the world.
No bank has been more successful in entering new markets and immediately growing market share than Cincinnati’s Fifth Third. Its philosophy has been to acquire a strong bank in a market and put together a product package that is superior to anything offered by its competitors. Leading the way, typically, is free checking.

So confident is Fifth Third in its prowess to integrate its acquired banks, and contrary to the long-held perception that the bank is among the nation’s most conservatively managed, Fifth Third hasn’t hesitated to pay top dollar for its acquisitions. Its recent Tennessee acquisition of Franklin Financial Corp., a nine-branch bank based in a rapidly-growing contiguous county to Nashville, is a case in point. Fifth Third paid $317 million for Franklin National, which had barely penetrated the Nashville market. Its perceived potential in the market, however, was far and away the primary reason for the acquisition.

Similarly, Fifth Third paid $1.58 billionu00e2u20ac”a 40% premium to marketu00e2u20ac”to acquire Naples-based First National Bankshares of Florida in its bid to increase its Sunshine State presence. CEO George Schaefer’s common-sense rationale: “Two hundred fifty people today left the state of Ohio to take up residence in Florida. That’s what we’re chasing down there.”

In contrast to Commerce Bank’s focus in adding customers through convenient branches (pardon me, convenient “stores”), Fifth Third’s focus is on market share. Commerce Bank’s Vernon Hill likes to talk about building a branch for $1 million that will generate first-year deposits of $100 million. Fifth Third CEO Schaefer keeps an unwavering eye on loan originations per branch. One of the appeals to Schaefer of the Florida acquisition was First National of Floridas’ $100,000 per month in loan originations, compared to Fifth Third’s $650,000 per month per branch in consumer loans. If that’s not looking at a glass as half full, what is?

Along the way, Fifth Third has maintained an image nationally and in its own markets that is seldom enjoyed by aggressive banks. Customers and competitors like them, they really like them. In Fortune magazine’s 2003 listing of America’s Most Admired Companies, Fifth Third topped the list among the superregionals. Its “Seven Day a Week Banking” slogan seems to have become emblazoned in the public’s consciousness, and whenever competitors have reacted in kind, Fifth Third manages to get the credit for innovation and convenience. Even the investment bankers have fallen in line. As a group, they have uncommonly, and sometimes inexplicably, loved Fifth Third, giving the bank a generous hall pass during last year’s regulatory bumps that slowed its acquisition strategy for a year or so.

As with Commerce Bank, it doesn’t seem to be necessary to give away the bank to make the world love you. As interest rates have headed upward, Fifth Third has not been aggressive in paying top dollar for consumer deposits. While many banks slightly increased rates on deposits after the Federal Reserve twice increased lending rates this past summer, Fifth Third was among the laggards.

Once again, Fifth Third’s continuing place among the most profitable, most well-managed, best-respected banks in the country is strong evidence that, far from becoming a commodity business, retail banking is becoming a business of thoughtful positioning, great marketingu00e2u20ac”and dedicating resources to take that positioning and marketing to the public.
Who might have guessed that it would be a savings bank, of all things, that would be audacious enough to change the look of American banking and voracious enough to take that bold new look from coast to coast? Yet that’s what Wamu has done with its trendsetting “Occasio” branches, the centerpiece of the bank’s highly successful retail marketing effort.

Wamu is all about brand. Like those other Seattle-based power brands, Starbucks and Microsoft, Wamu has taken a handful of brand characteristics, positioned them as unique, and advertised them heavily. The result? A sterling public image: Wamu trails only American Express in Fortune’s list of America’s Most Admired financial companies, and ranks first for innovation. Given the decade’s head start by companies like Citibank and Bank of America, that’s no small feat for a late entry from the Northwest. Yet it’s a testament to the brilliance of Wamu’s branding that the perception of the bank’s uniqueness may be more distinctive than the reality.

Example: the Occasio branch itself. It can be disorienting to walk into one of the thousand or so Wamu branches that have adopted the full Occasio look. Some have likened the Wamu branch to a cellular phone store, rather than a typical branch, with its pods devoted to teller towers, loan applications, and separate customer lounge areas. But then again, that’s exactly the approach the bank set out to achieve. “Washington Mutual has been recognized nationally and internationally for our innovative brand of retail banking,” says Kerry Killinger, Washington Mutual’s chairman and and CEO. “In recent years while other banks were pushing their customers out to ATMs and disincenting interaction with tellers, we were growing our deposit base nationally by taking the exact opposite approach. Other U.S. banks took notice of our success and have suddenly ‘rediscovered’ the value of branches.”

So convincing has been Wamu’s preaching about Occasio’s uniqueness that even the U.S. Patent Office bought it, granting the bank a patent on its design and retail marketing model. Yet, when one looks around at the branching landscape today and sees Umpqua Bank’s lobbies with coffee stands and computer areas for free customer use, or the customer-friendly coin-counting kiosks at every Commerce Bank location, while Wamu’s Occasio branches are indeed refreshing, its hard to argue they are unique by today’s standards.

Another example: free checking. No bank has been more closely associated with the move to free checking nationally than has Wamu. Its own customer research consistently shows that the bank’s free checking, along with its no-surcharge policy when noncustomers use its ATM machines, are the prime reasons new customers open accounts with Wamu. Yet the great success of Washington Mutual isn’t its free checking policy; it is that an extraordinarily high percentage of Wamu customers don’t even have free checking, but instead voluntarily purchase one of the bank’s enhanced accounts, either the “Plus Package” option to its free checking account, or choosing Wamu’s $7 a month Gold Checking program or its $9 Platinum Package. The result, of course, is a service charge revenue line on the P&L that has other “free checking” banks scratching their heads. It really doesn’t matter that Wamu’s average service charge is in fact unusually high. More important for its brand, it is that Wamu is seen as the “free checking” bank, with all the goodwill among prospects and customers that this perception brings.

Five years ago, few in the industryu00e2u20ac”and practically no one outside itu00e2u20ac”would have identified Commerce Bank, Fifth Third, Umpqua Bank, and Wamu as the banks that would literally change the face of American banking. Yet they have done so, and now new players and new brands are nipping at their heels.

The spirit of A.P. Giannini is alive and well, proving that old businesses can be reinvented with the same hard work BofA’s founder applied to bankingu00e2u20ac”by knocking on new doors through sophisticated technology and marketing techniques, but with the same human touch that has always drawn customers and built banks.