There is often a feeling in the business community that because something has been done in one way for many years, that such a method is inherently correct. In the corporate world, old habits tend to die very hard. None more so than in Australia’s banking oligopoly, which has tended to treat depositors with disdain, regularly loses money on loans made to flamboyant businessmen during boom periods and is overly willing to lend to borrowers purchasing residential property.
However, simply because that is how it has always been done doesn’t make it right.
Ask 65-year-old Vernon Hill, one of America’s most colourful and successful retail bankers. Hill created Commerce Bancorp and in 2007, sold the bank to TD Bank Financial Group for $US8.5 billion, himself netting $US400 million. (Hill has shortly before been forced out of the company after refusing to curb his penchant for related party transactions).
Fortune Magazine earlier this year produced a fascinating insight into Hill, and his plans for a new British bank called Metro — the first new bank to open up in the UK in more than a century.
The profile of Hill shows a very different banker to those who run Australia’s financial institutions.
Instead of treating depositors like cost centres, shortly after opening in 1973, Hill realised that low-cost deposits are a key element to running a successful bank. Deposits are to a bank what raw food is to a restaurant, a key raw product — the cheaper the input, the more profit that can be earned.
Most banks (especially those in Australia), compete for deposits almost purely on price. That is, they give depositors a higher interest rate of they are trying to increase their funding levels. Hill however, took an entire different approach, as Fortune noted:
[Hill] shuns orthodoxy by putting loads of money and training into coddling customers. “Retailers that invest in their stores do well,” says Hill. “Those that disinvest, like most banks, do poorly.” In the early 1970s, Commerce was among the first banks in the US to stay open in the evenings and on Saturdays. Hill introduced free coin-counting machines. “Those machines cost $40,000 each, and they’re free to non-customers!” says Hill. “Just try to get a committee at a big bank to approve that expense.”
Such a view would be considered heresy at an Australian financial institution, which tends to treat depositors with disdain. Only until government regulation and civil law suits arose did the large banks stop charging billions of dollars in unethical and probably illegal fees to depositors. Hill would no doubt shudder at the thought that Australian banks used to charge depositors a substantial fee for cashing a “bounced cheque”, as if they should have run a credit check on the person paying them.
Australian banks have been extraordinary profitable over the past two decades, increasing returns on equity despite a short blip during the global financial crisis. But that profitability may very likely be a mirage. That is because Australian banks tend to make highly risky lending decisions, usually, without actually realising those decisions are risky. Westpac almost collapsed in the early 1990s after lending billions to shady entrepreneurs while all large Australian banks have jumped head first into Australia’s property bubble, with the CBA lending more than 60% of its balance sheet to residential property buyers.
Unlike Australian banks, Hill’s Commerce Bank would use extraordinarily cheap deposits (by providing lavish customer service and long opening hours Commerce Bank was able to pay deposits at a far lower interest rate than other banks) to invest in conservative loans and safe securities. Hill’s business model was almost diametrically opposite to the risky practices of Australian banks, which almost go out of their way to alienate depositors and as a result are forced to pay far higher interest rates for their funding.
Well-paid Australian bankers should perhaps heed Hill’s advice — considering himself first and foremost a retailer, the opulent Hill (who lives in one of America’s largest homes) noted, “the worst thing that could happen is that we turn into bankers!”