Business

Breaking the mould: Metro Bank’s bosses on why the sector needs a shake-up

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Most interviews with Metro Bank’s founder, Vernon Hill, start with a bit of colour: the bank’s coin-sorting machines; the entrance of Sir Duffield II, the second dog to bear the bank’s flag; or Hill’s own uniform of double-breasted suit, tie bar, and red “M” cufflinks.

This time around a conga line of about 50 employees dances around the office singing Mambo No. 5; this is not a normal bank.

This is the routine for all new employees, from clerks to senior managers. Metro Bank was the first new high street bank in 100 years when it launched in 2010, and US levels of customer service for its “fans” – to make your average Briton cringe – are a key part of the sell.

At a time when the big British banks are pulling back and closing branches, Metro Bank is pursuing a headlong expansion plan. Hill’s condemnation of the incumbent lenders could barely be more cutting.

“The British banking market has been a cartel for 40 to 50 years,” says Hill, sitting in his office in Holborn. “Because of that they’ve underinvested in facilities, people, IT.”

Hill’s thesis is that the lack of competition led to a “we’re doing you a favour” philosophy in British banks and a complacency which has made them vulnerable to disruption. Meanwhile, the model of crossing investment and commercial banking on both sides of the Atlantic has “pretty much failed”, he says, pointing to Barclays’ travails.

Craig Donaldson, the bank’s Sunderland-born chief executive, presents a different image, but his message is almost exactly the same: the UK presented an “MBA study of perfect markets to attack”, with a few incumbents and a huge market.

They are putting their money where their mouth is, with targets set out to 2023 – an unusually long period – saying they will more than quadruple their deposit base from £11.7bn to more than £50bn.

Neither are Donaldson and Hill shy of talking bigger. The chief exec bandies around £100bn in deposits as a target beyond 2023, while Hill points out that 10 per cent of the total deposit business would be £200bn – a figure he reckons would value the bank at £40bn, bigger than Barclays and Royal Bank of Scotland at current prices.

Going after growth

Both Hill and Donaldson exude supreme confidence that they can hit their targets. Indeed, the septuagenarian Hill corrects a reference to “aggressive” expansion; it’s “very aggressive”.

“This is a power retailer that happens to be a bank,” says Hill when describing his model, and Donaldson confirms a “zealot-like focus on the customer” shared by big retailers.

Banks with heavy bricks and mortar presences are not generally having a great time at the moment, but while the ultimate aim is to quadruple the number of “stores” – never branches – the locations are all carefully chosen for maximum impact, with prominent corner locations serving as advertisements as much as locations for the actual job of banking.

The retail model extends to business banking as well: on Hill’s desk terminal he has a feed of Metro’s price to book ratio in comparison to the big competitors, plus business banking challenger Aldermore. While the consumer offer understandably gets the focus, serving larger corporates as the bank’s assets grow is a key part of the growth story in the future.

Challenges to the challenger

Hill acknowledges that the rise of the internet banking has prompted an adjustment in the branch opening plans, with more routine transactions done remotely, but he is more sceptical about the potential of open banking regulations to really expose the incumbents to a wave of competition, as some industry commentators predict.

“If you believe in open banking you have to believe that customers are going to want us to share their personal financial data with third parties,” he says. “That’s a mighty hard theory for me to get to. But we’ll see.”

He adds that it “interesting” that online-only banks have foundered on both sides of the pond. The rise of app-only banks could see the model finally work, although Hill is clearly doubtful, refusing to say if he thinks the likes of Monzo and Starling can succeed.

Hill’s doubt is probably misplaced, given some of the digital-only banks have already reached profitability, but then again, his banking instincts have been proved repeatedly. Above his desk in London hangs a Forbes article showing 30 per cent returns to shareholders every year for more than 30 years – a distinction matched only by six chief executives (including a certain Warren Buffett).

He has started five banks in his lifetime: it was Commerce Bank which made him a billionaire when he was bought out. It provided the model he has “transplanted” to the UK. Alongside Metro Bank he now chairs the board of Republic Bank, a fixer-upper in Philadelphia aiming to “go take the Commerce Bank market share back”. Republic’s 23 branches are carbon copies of the UK Metro versions, right down to the colour scheme and the fixation on allowing dogs.

Both sides of the pond

Hill’s unique experience founding banks on both sides of the Atlantic (split between London and Philadelphia every fortnight) give him perhaps the best basis for transatlantic comparison of anyone in the business. His conclusions are somewhat surprising, with a firm endorsement of the UK.

The government is not a “distraction” from growth, and regulators are “enlightened” compared to the US – for which read there is less regulation. Hill’s standard Republican views are confirmed when he backs President Donald Trump’s economic policies to the hilt, adding that the strengthening global economy has nothing to do with the acceleration in US economic growth (which started before the last presidential election).

In the UK Brexit is in a “confused state”, but probably won’t result in disaster, he adds. Either way, he says it will have little impact on Metro Bank’s business.

Yet he is less complimentary about British investors. Metro Bank launched in 2010 with 90 per cent US private capital, and it is still owned by 85 per cent Americans, and he gives short shrift to analysts on this side of the pond who say the firm’s targets are just too ambitious.

“American investors believe in growth,” he says. “British equity investors, I call them bond buyers in disguise.”

The bank will have to go to investors “multiple times” in the coming years to raise an amount of capital he refuses to disclose to fund its growth, but he is certain that his US investor base will lap it up, as they did the equity fundraising – and he has so far not gone to debt markets, giving capacity for that avenue in the future.

Metro Bank is still “a new, fresh, dynamic growth company almost priced like a tech company,” Hill insists. His final goal? “100 per cent of the market,” he says, with a wolfish grin. “Of course, only an American would say that.”

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