9.14 Commerce Bancorp, Inc.

Commerce Bank, also known as Commerce Bancorp, and more familiarly as 'America's Most Convenient Bank', was a leading retailer of financial services with over 450 convenient stores in New Jersey, New York, Connecticut, Pennsylvania, Delaware, Washington DC, Virginia, Maryland and Florida. Headquartered in Cherry Hill, NJ, Commerce Bancorp (NYSE: CBH) had $50 billion in assets.

In October 2007, the TD Bank Financial Group acquired Commerce Bank in a 75% stock and 25% cash transaction valued at US$8.5 billion. Under the agreement, Commerce shareholders received 0.4142 shares of a TD common share and US$10.50 in cash in exchange for each common share of Commerce Bancorp Inc. The consideration was negotiated on the basis of US$42.00 per share value for Commerce Bank. {1}

Background

US retail banking is a mature and highly competitive business where improvements in rate differentials or services are quickly matched. Many mid-tier banks were acquired or squeezed out in the 1980s and 1990s, leaving local communities with a restricted choice. To meet acquisition costs, the larger banks have generally displeased their retail customers by:

1. Targeting richer customers with bundled investment offerings.
2. Offering more basic and standardized service to other customers.
2. Replaced personal services by cheaper ATM and Internet services.

By 2001, surveys indicated that only 53% of retail customers were satisfied with their bank. Disaffected customers shopped around, and the larger banks lost a third of customers each year.

America's Convenience Bank

Commerce Bancorp set out to counter this tendency by focusing on the customer. The bank: {1}

1. Thought like a retailer and designed banks with roaming tellers and children's play areas.
2. Built a 'customer first' approach into everything, from selection of front-line employees to staff training.
4. Opened at hours convenient to customers: weekends and evenings.
5. Offered the usual services but made them responsive: fees were reimbursed for out of network ATMs, for example.
6. Stayed close to parity on the price value vector (see below) but didn't attempt to match their lowest-priced rivals.

Value Vectors

When able to do so, customers opt for better value, but that better value can be price, performance, or relational value. {1}

Price value covers:

1. Best price for a standard product.
2. Acceptable quality.

Performance value covers:

1. Better functionality.
2. Innovative features.
3. Improved quality.
4. Superior design.

Relational value covers:

1. Personalized treatment.
2. Products tailored to the customer's needs.
3. Integrated solutions.
4. All-round service excellence.

Typically, as a product or service matures, its value vectors change in their importance.

Outcomes

Until taken over by the TD Financial Group, Commerce Bancorp:

1. Expanded rapidly, from 150 branches to 450 over the 1999-2008 period.
2. Achieved an average annual revenue growth of 28% and annual asset growth of 36% over the 1999-2008 period.
3. Grew deposits from $5.6 billion to $27.7 billion over the 1999-2004 period.
4. Increased loans from $3 billion to $9.4 billion over the 1999-2004 period.
5. Grew deposits by nearly 40% in 2001, against a nationwide average of 5%.
6. Cut its customer defection rate to half that of its larger rivals.

Questions

1. What has the banking sector generally done to cover acquisition costs? How was Commerce Bancorp different?
2. What are value vectors, and how do they generally evolve with market sector maturity?
3. Given that Commerce Bancorp was eventually taken over by another bank, in what sense was its business strategy successful?
4. What elements of Osterwalder and Pigneur's business model throw light on Commerce Bancorp's strategies?

Sources and Further Reading

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