oscm_harvard business case_commerce bank

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Binus Business School,

MM Executive Batch 20

Presented by Group I

Alexander Christian

Dina Sandri Fani

Jenna Widyawati

Ridwan Martawidjaja

Case Study AnalysisCommerce Bank

Table of Contents

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The Story of Commerce Bank

Deep Dive Analysis of Commerce Bank

Conclusion & Recommendation

Insights from the U.S. Banking Industry

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Commerce’s Flashback in Years

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• 1973 Founded by Vernon Hill. Set up to “be

different” as the world did not need

another “me-too” bank

• Early 1990s 4 branch offices were purchased from

Long Island-based Anchor Savings Bank

• 21 Jan 1997 Independence Bancorp, Inc. became

Commerce Bank/North

• 13 Aug 1998 Community First Banking Company & its

subsidiary Tinton Falls State Bank

became Commerce Bank/Shore

• 17 Sep 1998 Prestige Financial Corp & its subsidiary

Prestige State Bank became Commerce

Bank/Central

• 25 Jul 2005 Palm Beach County Bank established

Commerce Bank in Southeast Florida

• 2006 Purchased eMoney Advisor

• 2007 Acquired by TD Bank Financial Group

Dare to be different since beginningActed and thought as a retailer, not as a banker!

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Brought retail experience to

banking

Competed on service rather than rate

Deposit rather than loan as a core

product

Lollipops and dog

biscuits in the lobby

and drive-thru

Playful events, e.g.

Red Fridays

Longer operating

hours

Hassel free

products, e.g. no

transaction fee, no

fee to the ATM

Deposit as a core

product

No deposit, no loan!

Grew much higher

than industry

Defying conventional wisdom helped Commerce Bank to grow as one of the

fastest growing banks in the US!!!

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Customers typology in the U.S. banking industry

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• Service Excellent

• Fast and easy experience

• Call center 24 hoursWants

• Better rates

• Safety on their accounts

• Nothing will be your problem, we take care

Needs

• Fully trained cast member

• Friendly persons: give the customers confidence and excellent advisement

Searches

• From traditional, full-service transaction to electronic, self-service transaction

Evolves

Loans as a core products compared to depositsGrowth was about 20% over the period of 1998 to 2001

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Loans

Deposits

3.18 3.43 3.76 3.82

3.68 3.834.18 4.39

1998 1999 2000 2001

Commercial Banking Industry Figures Loans vs. Deposits (in tn USD)

Loans Deposits

2 main products:

86.41%

89.61% 89.85%

87.06%

1998 1999 2000 2001

Commercial Banking Industry Figures Loan-to-Deposit Ratio

Major trends in industry:

• A push to increase the “cross-sell” of products. Customer has 1.5 to 2.5 products with the banks

Cross-sell

• Growing revenues from non-interest income

Fee revenue

Low service quality resulted to low satisfaction and high customer

attrition rate

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Customer satisfaction

historically been quite

low

Only 53% of retail bank

customers satisfied with

the provided services

Demographics-based

segmentation

Customer lifetime

value/customer

profitability as a

segmentation variable

Help the banks to

differentiate the service

amongst customers

High attrition rate

One-third of customer

base each year to

attrition

Mostly occurred in the 1st

year of a banking

relationship

34% dissatisfied with the

service provision; 34%

due to geographic move

Customer Attrition

Decision to choose a bank mostly influenced by proximity of a

local bank

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Forcing banks to deploy the following channels:

Branches• Enormous branch networks to getting

closer with the targeted segment

ATM networks

• Large ATM networks to ease customer doing a transaction

• Free base vs. fee base

• ATM transformation: from cost center to profit center

24/7 call centers

• Including Voice Response Unit (VRU)

• Allowing customer execute an increasing no, of transaction via telephone

A. Traditional channel B. Modern channel

Internet Banking era

Banks to have a lower

marginal cost

Full-service channels to

self-service channels

Monetary incentives

for using electronic

channels

On the other hand,

impose monetary

penalties for using

traditional channels

Front-line employees are vital for retail banks

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Selection criteria were as

follows:

Be able to perform

repeated tasks, interact

with customers

Willingness to accept

relatively low wages

Undergo series of training

to ensure compliance with

processes & product

attributes

Learning about bank-

specific policies &

procedures

Product knowledge

training

Main KPIs:

Volume of calls

handled

No. of transactions

processed

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Commerce Bank in NumbersGrew faster than the U.S. banking industry due to the implementation of revolutionary

business model

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4.98

6.73

8.86

12.27

1998 1999 2000 2001

Commerce Bank Financial FiguresTotal assets (in bn USD)

297 393

523 625 74

97

156

198

1998 1999 2000 2001

Commerce Bank Financial Figures Interest Income vs. Non-Interest

Income

35% of CAGR from 1998 to 2001

Mostly came from securities and net

loans & leases

Income mostly came from interest

compared to non-interest

Non-interest income recorded higher

CAGR compared to interest income

(39% vs. 28%) following industry’s trend

Commerce Bank in NumbersCommerce went to a different direction as compared to industry, resulted to a lower loan-to-

deposit ratio and higher expense ratio

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43.16%

52.48% 49.91%45.48%

86.41% 89.61% 89.85% 87.06%

1998 1999 2000 2001

Loan-to-Deposit Ratio Commerce Bank vs. Industry

Commerce Industry

Lower loan-to-deposit ratio as

compared to industry

Deposits as a core products: no loan if

no deposit

77.7% 77.4%

80.2%78.2%

76.9%74.1%

75.7%73.2%

1998 1999 2000 2001

Total Expense Ratio Commerce Bank vs. Industry

Commerce Industry

Commerce sacrificed its expense ratio

in order to create a superior customer

experience

Total expense ratio is higher as

compared to industry

Commerce Bank in NumbersDeposits grew way above the industry due to its unique proposition; while on the other

hand, loans & leases still grew nicely

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4.505.67

7.44

10.23

1998 1999 2000 2001

Commerce Bank Financial FiguresTotal Deposits Growth (in bn USD)

31%

Provided convenient service instead of

high deposit rate

Core product for Commerce: growth had

averaged over 30% since 1996

1998-2001 CAGR was 31% much ahead

industry of 6%

More than half of it were consumer

business

1.94

2.98

3.71

4.65

1998 1999 2000 2001

Commerce Bank Financial FiguresNet Loans & Leases Growth (in bn

USD)

Implemented “No deposit, no loan”

policy

Loan-to-deposit ratio was significantly

below the industry average due to tight

credit acceptance policy

Net loans & leases CAGR was 34%

Commerce’s SWOT AnalysisCommerce had a strong positioning in service area; however, competitors were beginning

to adopt some of its basic offerings

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S W

T

Strengths

• Retailer mindset

• Customer-centric program

• Consistent service delivery

• Excellent service innovation

• Walk the talk attitude

• Passionate employees

• Financial growth

Opportunities

• Enormous market

opportunities

• Expanding the business to

related financial sector such

as insurance

• Expanding overseas

Threats

• Fierce competition:

competitors were beginning

to adopt some of its basic

service offerings

• Lack of creativity and

innovation to keep ahead of

the competition

O

Weaknesses

• Provided the lowest deposit

rate

• Higher operating cost as

compared to competitions

• Less focused on

responsiveness, reliability,

and assurance

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Commerce Bank’s Business Model

Customer Segments

Mass Market: covering business and individual customer from young age to senior citizen

Customer Relationships

Full Service

Personal assistance at branches and call center

Automated services through online banking

Value Proposition

Excellent service with personal touch & attitude

Different experience through retailtainment

Convenient operating hours

Inviting and comfy branches

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Key Resources

Enthusiastic employees

Inviting branch at the right location & other physical facilities

Commerce culture to innovate, continuous improvement and customer service

Key Activities

Provide loan

Collect core deposit

Call center

Online banking services

ATM provider

Marketing

Key Partners

ATM providers

Street vendor and performers to assist marketing campaign

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Channels

Marketing through: Street vendors, direct mailing, ads on public places, ads on company’s van.

Banking services provided through: branches, ATMs, call center, online banking

Cost structure

Labor cost

Marketing & advertising cost

Design, construction and maintenance of branches

Employee training and development program

Revenue Streams

Fee on banking services

Interest from loan

Commerce’s Core Service Business ModelThey were here to blow customers away through creating a strong service business

management model

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Core service Model

Service

Offering

Funding Mechanism

Customer

Management

Employee

Management

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2

3

4

Focus on the experiences

customers want to have

Agreed on which attributes of

service the business will

compete on

At the same time, define what a

business chooses not to do well

Develop a way to

fund excellence

4 basic forms: 2

are ways of having

the customer pay,

and 2 cover the

cost of excellence

with operational

savings

Involving customer on

value-creation process

Clear on 3 keys areas, i.e.

which customers group,

which customer behavior,

which effective techniques

to influence behavior

More impact for service

businesses

Well-integrated employee

management system must

be reflected on recruitment

process, training, job

design, and performance

management

Commerce’s Service OfferingDespite following the industry’s trend by providing customer good rate, Commerce decided

to compensate its low rate through excellent service offering

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1

Core offerings:

1.Checking account

• Standard checking

• Internet checking

• 50 Plus club

• Consumer

checking

2.Loans

3.ATM

4.Cash reserve line

(overdraft protection)

Facilitators

Information

• Live agents instead of Voice

Response Unit (VRU)

Order taking

• Loans assigned to service

branch instead of Head

Office

• Weekend banking

• Longer operating hours

Billing

• Personal sign-off by

customer on loan papers at

service branch

• Online monthly statements

Payment

• Easier, since loan customer

also has a deposit at service

branch

Differentiators

Consultation

• Branch Manager / Loan

officer helps to manage

loans & deposits

Hospitality

• Phones at ATMs

• Employee escorts with

umbrellas during rains

Safe-keeping

• Check View Feature

Exception Handling

• Penny arcades to handle

coins

• Midnight timing at busy

locations

• 10 minute rule

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Commerce’s Service OfferingDetail explanation: Commerce’s service offering basically divided into two categories, i.e.

core service offerings and supplementary service offerings

1

Core service offerings

Not very different from what

other banks in the industry

offer

However, had a different

focus from execution stand

point

Deposits base instead of

loans base as a driver of

operations and growth

No. TypeMinimum

BalanceDetails

1 Standard

Checking

$100 No monthly service fees

2 Interest

Checking

$1000 No monthly service fees,

Unlimited check writing,

Interest

3 50 Plus

Club

$100 No account maintenance

charge for checking

account with interest, free

checks, money orders,

notary service and

travelers’ checks

4 Consumer

Checking

None No per check charge for

first 8 checks/month for $3

monthly fee

Deposits Offering Details

No monthly service fees for

the 1st 3 years and free 1st

order of checks

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Commerce’s Service OfferingDetail explanation: Commerce’s service offering basically divided into two categories, i.e.

core service offerings and supplementary service offerings

1

Core service offerings

Loans

ATMs

Cash reserve line

• Commerce’s value is not in its loan base but in its

deposit base

• Loans are not given out as easily as other banks in

the industry

• Credit quality checks for loan approval is very

stringent

• “No deposit no loan” policy

• Withdrawals were available at any ATM and

purchases anywhere Visa was accepted

• Transactions were immediately reflected in accounts

and statements

• All accounts could be combines with a Cash Reserve

Line to ensure protection from overdrafts

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Commerce’s Service OfferingSupplementary service offerings were designed to WOW customers. Consisted of

facilitator offerings and differentiator offerings

1

Facilitators

Information

• Live agents instead of Voice Response Unit (VRU)

Order taking (banking context: cash withdrawal & loan

application process)

• Loans were assigned to service branch instead of Head

office for easy access for customer

• Weekend banking facilities were provided to allow

customers to bank on Saturdays & Sundays

Billing

(Banking context: loan approval and monthly

statement generation process)

• Personal sign-off by customer on loan papers at service

branch

• Online monthly statements

Payment (loan repayment process)

• Payment is easier for customer and assured for

bank, since loan customer also has a deposit at

service branch

Differentiators

Consultation

• Branch Manager/loan officer helps to manage loans &

deposits

Hospitality

• Helpline phones at ATMs

• Employee escorts with umbrellas during rains

• Lollipops and dog biscuits at drive through banking

windows

• Coffee and newspapers in waiting lobbies

Safe Keeping

(Banking context: peace of mind about account balances

and check deposits)

• Immediate updating of ATM withdrawals in online

statements

• A ‘Check View’ feature on Commerce’s website

Exception handling

(Banking context: Coin currency & Irregular hours )

• ‘Penny arcades’ to handle coins

• Midnight timing at busy locations

• 10 minute rule to increase banking hours by 20 minutes

in a day’ operation

Commerce’s Funding MechanismBasic theory to analyze Commerce’s funding mechanism

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2

Funding Mechanism

Let the customer pay

Charge the customer in a

palatable way

Giving a half percentage

point less in interest on

deposits for open late and

on weekends operations

Create a win-win between

operational savings &

value-added services

Enhance the customer

experience while spending

lunch

Operational savings

Spend now to save later

Make operational

investments that will pay off

eventually by reducing

customers’ needs for

auxiliary service in the

future

Have the customers do

the work

Put the cost back in the

customer’s court, but in the

form of labor, e.g. through

offering self-service

Frei, HBR: 4 basic forms of funding mechanism

Commerce’s Funding MechanismCommerce mixed 4 basic forms for its funding mechanism implementations

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2

Funding Mechanism

Let the customer pay

Charge the customer in a

palatable way

Simply to have the

customer pay for it, but

possible to make the form

that payment takes less

objectionable to customers

Operational savings

Spend now to save later

Heavily invested on

branches: branches were

built to be inviting

Broke even within a year to

18 months compared to

three years of the average

bank

Have the customers do

the work

Provided “check view”

feature on the bank’s web

site that allows customers to

see an image of the front

and back of a check

Frei, HBR: 4 basic forms of funding mechanism

Commerce’s Funding MechanismDetail Analysis: How Commerce funded its excellence

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Commerce’s start-up and

growth strategy

Commerce’s banking &

lending operations

Funding Mechanism

How Commerce

funded its own

growth

How Commerce

functioned as a

bank?

Commerce’s Funding MechanismStart-up and growth strategy: focusing on organic growth and bring the retail franchise

expansion model into its banking operational

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Commerce’s start-up and

growth strategy

Founded in 1973 with $ 1.5 million as startup capital (assumed to

be seed capital not VC funding)

Chairman & CEO, Vernon Hill did not believe in M&As as a growth

strategy but as a cost-cutting measure

Started operations as a community bank in southern New Jersey

Used the retail franchise expansion model (without acquisitions)

to grow

Expanded into branches in Pennsylvania, Delaware and New York

Concentrated on seeing customer as a revenue-generator (not

cost center). However, cross-selling was not encouraged since

main revenue stream was considered as deposits

Expansion into New York was done organically (Branches were

wholly owned and run by Commerce and promoted heavily

(Spends - $500,000 per branch)

By 2001, Commerce had $ 1 billion in core deposits

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Commerce’s Funding MechanismCommerce’s banking & lending operations focused on its 2 products, i.e. deposits &

loans. It had a different approach in running its operations as compared to industry

2


lending operations

Business philosophy

Operations in

deposits

Compete on service not on rate

Focus is customer experience

Operations is designed to WOW

customers

Low-expense ratios are bad

Outgoing friendly service

Rates need not be the highest in

the industry (only 3% want this)

Longer operating hours allow for

more time for customer service

(62% want this)

Non-interest income revenue (i.e.

ATM charges) must be used as

competitive advantage to grow

and not simply be an addition to

the bottom line

Cross-Selling products

Preference to electronic channels

Non-interest income revenue

Pushing customers out of

store(bank)

They are transaction-oriented and

low growth

Dozen or more types of checking

accounts

$5 monthly fee for Internet

Banking facilities

Commerce Industry

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Commerce’s Funding MechanismCommerce’s banking & lending operations focused on its 2 products, i.e. deposits &

loans. It had a different approach in running its operations as compared to industry

2


lending operations

Operations in loans

Results

Assigned to customer service

branches that received credit for

deposits

Low loan-deposit ratio

Stringent credit quality checks

Customers mostly commercial

real estate projects, mortgages

and consumer loans

Loan officer is also branch

manager

• Deposit Growth (2001) - 40%

• Online Usage - 34%

• Net Income growth (1998-2001) -

200%

Loan delivery is centralized

leading to customer and loan

officer disconnect

Loans are 90% of deposit base

(2001)

Lower credit quality loans (i.e.

sub-prime mortgages) get

approved

Loans not linked to deposits

• Deposit Growth (2001) - 5%

• Non-interest income growth –

27%

• Interest Income growth – 11%

• Customer attrition – 1/3rd of

customer base

Commerce Industry

Commerce’s Employee Management SystemAnalyze how Commerce instilled WOW service business model into its employee

management system

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Employee Management

System

Hiring

Training

Work Autonomy

Workplace involvement

Appraisal or Performance Measurement

Rewards

Major challenge is

how to create a

customer-centric

organization that is

reflected through

Commerce’s

employee

management system


management system

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3

Employee Management

System

Hiring

Training

Work Autonomy


Appraisal and Performance Measurement

Rewards

Getting the right people and

integrate them with the entire

Commerce’s culture

Objective

Does not always recruit the

best talent

Prioritize to hire average

people with service attitude

Tough hiring process reflected

by extensive number of

interviews

Consider experienced people

for part time job

Utilize interview processes to

learn about competitors

High level strategy


management system

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3

Employee Management

System

Hiring

Training

Work Autonomy


Appraisal and Performance measurement

Rewards

Use WOW program in designing

service curriculum applied for entire

Commerce organization

Objective

Formed full time education and

training facility named Commerce

University

Easy to remember framework for

learning Commerce service

deliver model: SMART Principle

(Say YES to customers, Make

each customer feel

special, Always keep customer

promises, Recover, Think like a

customer)

Service-oriented courses

selection for new employees

(“Traditions”) and senior

executives

High level strategy


management system

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3

Employee Management

System

Hiring

Training

Work Autonomy


Appraisal & Performance measurement

Rewards

Encourage and empower

employees to participate on “Kill

the stupid rule” program

Work autonomy

All employees encouraged to

hand out their visiting cards to

recruit potential employees

Redeemable WOW! Stickers

WOW! Awards and Musical

performances

Playful events like Red Fridays



management system

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3

Employee Management

System

Hiring

Training

Work Autonomy


Appraisal and Performance Measurement

Rewards

Service performance as one of the

KPIs. Measured thru mystery shopping

Competition between branches in

different regions in the form of Leagues

(assuming this is like football or

baseball leagues) to get the best

service report

Appraisal & Performance

Monetizing mystery shopping result:

salary increased based on the result

Glamorous prizes for top performers

(like a leased Porsche Boxster for 1

year)

$5000 reward for the staff of nearest

Commerce branch where a competitor

closed down

$50 reward for suggesting improvement

in the ‘Kill the rule’ program

Rewards

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4Commerce’s Customer Management SystemAnalyze how Commerce developed its customer management system in accordance with

its service business model

Customer Management

system

Customer acquisition

Customer retention programs

Industry Norm

Push more product through cross-selling

Transactions-based KPIs rather than customer

satisfaction or repeat customers

Customers were seen as cost centers and in

order to keep a low-expense ratio were pushed

to use the electronic channels (full-service to

self-service)

Also, customers using the conventional personal

(teller) banking channel were penalized

through extra fees

This savings in the marginal cost was then used

to give a higher interest rate which banks felt

was the only way to attract new customers.

Commerce chose the opposite strategy and to

compete on service aspects by focusing on superior

customer excellence delivery

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Customer Management

system



Commerce’s acquisition strategy

Branches located close to competitors branches

and designed to be inviting, open windows

Red & blue painted commerce vans helped

create free advertising opportunities

Building designs across all branches were

consistent (Note: consistent message to the

customer – Integrated marketing

communication)

Very high promotional spends for every new

branch in the form of direct mailings, subway

ads, phone kiosks and free food (like 10,000 hot

dogs in Commerce napkins)

Free gift for the first time customers

Employees treat customers with outgoing

friendly service and do not try to cross-sell

products or push customers out of the store after

they finish their transactions

Loan applicants were encouraged to open

deposit accounts first

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Customer Management

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Industry Norm

All banks provided the same ease-of-use

electronic banking features along with their

extensive branch networks

Having an issue on retention: high attrition rate

Main triggers of high attrition rate:

• dissatisfaction with steep fees and fee

surprises, poor service and errors (34%)

• outside of reach of current branch location

(34%)

• availability of more convenience such as

longer hours in other banks (15%)

Commerce’s retention program were designed to

target the above-mentioned customer pain

points which caused customers to switch banks.

Delivering superior customer experience, once

again, became a choice of Commerce for its

retention program

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Customer Management

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Commerce’s retention strategy

1. Create convenience at customer sides

• Extended banking hours (10 minute rule

allowed for 20 minutes of extra banking

everyday)

• Busy locations were open till midnight

(12:10 am)

• Weekend banking (Saturdays &

Sundays)

• Same branch look and feel

• Phones in ATMs reach helplines

• Live agents instead of VRUs

2. Boundary-spanning roles and interface

• Employee conduct monitored by

mystery shoppers for friendliness

(handshakes), consistency in greeting

and other procedural details when

dealing with customers

• Service-oriented KPIs to measure

employee’s performance

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Customer Management

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Commerce’s retention strategy

3. Up-close and personal service

• Guidance to manage deposit accounts

by branch managers

• Loan accounts handled by local

customer service branches and not by

central headquarters

• Guidance to manage loan accounts by

loan officers (who also happened to be

branch managers)

4. Customer delight features

• No fees for ATM and check cards

• Non-interest income (ATM charges/fees

for using other bank’s ATMs) returned to

customers

• Employee escorts with umbrellas to cars

during rains

• ‘Penny Arcade’ program to handle coins

with no charge either customers or non-

customers

• Gifts (pens and lollipops) at drive-

through banking windows

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1

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4

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ConclusionsImplementation of service-business model brought a big success for Commerce

Success Parameter

Deposit growth

(1996-2001)

Deposit growth

(2001 only)

Net Income growth

(1998-2001)

30% growth in average

Grew about 40%

200% growth (double the

net income)

U.S. banking industry grew

±20% from 1998-2001


only 5%


about 20%

Online usage Grew about 34% Wells Fargo: much lower

Commerce Bank Industry or Competitors

Retailtainment gave a set back for CommerceFailed to improve overall customer experience as it increased no. of customer complaints

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Original Plan

Improve the service experience for customer

waiting in branches

Triggered by the following:

competitors beginning to adopt some of basic service offerings

Allowing Branch Managers to suggest ideas (event wacky ones)

for entertaining branch customers on Friday afternoons

Actual result

No. of customer complaints were going up

It made the employees put more focus on the entertainment

aspect rather than service aspects

Customer did not expect to be entertained while waiting at branch.

What they actually need is a solution over their problem

Concerned arose on branding implications

Decentralized roll-out

Recommendations & Action Plans for Commerce

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Recommendations:

Discontinue Retailtainment program as it does not fit

with Commerce’s value

Back to previous service business model, i.e.

focusing on superior customer experience delivery

rather than providing entertainment to customers

Focus should be given to the effort of improving

quality of service. 3 main areas to be improved are

responsiveness, reliability and assurance

Improving brand positioning through consistent

service delivery

Maintaining and improving financial conditions

(deposits growth, net income)

Recommendations & Action Plans for Commerce

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Action Plans:

1. Create more effective and efficient

process

• Provide several service zones, i.e.

basic service area, quick service

zone, and complaint zone

• 3 types of front-liners, i.e. product

consultant, service consultant and

2. Launch service guarantee program

rather than continuing Retailtainment

program

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