A Charm Offensive to Lure Banking Customers in Britain

Vernon W. Hill II shook up American retail banking more than a decade ago, and now he’s bringing the same model to Britain.

In central London, at the flagship branch of his three-year-old banking start-up, Metro Bank, eager young tellers greet waiting customers as soon as they enter, directing them to plush leather couches.

In one corner of the branch, with polished floors and vaulted ceiling that are more akin to a car showroom than a wood-paneled bank, a machine with bright flashing lights beckons users to swap their pocket change for British pound notes.

And at the branch’s glass-filled entrance, a couple of dog bowls await customers’ pets in need of a drink while their owners cash checks or open a savings account.

“I’m a retailer, not a banker,” said Mr. Hill, a 68-year-old American entrepreneur who regularly brings his Yorkshire terrier, Duffy, to work. “British banks mistreat their customers.”

Metro Bank is Mr. Hill’s first foray back into the banking sector since 2007, when he was forced out of Commerce Bancorp. He had started Commerce in the early 1970s, but left amid federal scrutiny over his business dealings with family members and other company insiders. Soon after his departure, Commerce Bank was sold to TD Bank Financial of Canada for $8.5 billion, while the regulators’ investigation ended with no charges.

In his three decades at the helm, Mr. Hill expanded Commerce to around 460 branches, mostly in the Northeast, with combined retail deposits of more than $40 billion. To attract customers, Commerce kept its branches open seven days a week, and focused on amassing large deposits and improving customer service, instead of offering the best interest rates.

And that is exactly what he is doing in Britain. Metro Bank’s branches are open seven days a week and offer same-day replacement service for customers’ lost or stolen debit cards. At one location, customers can use drive-through tellers, a first in Britain.

Mr. Hill’s goal is to charm enough British consumers into switching their checking accounts and mortgages from the likes of Lloyds Banking Group and Barclays, which continue to dominate Britain’s retail banking sector.

“We’re running the exact same banking model here as we did in New York,” Mr. Hill said recently in an interview in his corner office above Metro Bank’s first branch in central London, which opened in 2010. “Banks in Britain act like a cartel. I’m in the business of gaining market share.”

His bullish words about taking on the country’s largest banks have resonated among British politicians. Local policy makers want to open up the country’s banking sector to new entrants after a series of bailouts and forced mergers during the financial crisis left Britain’s five largest firms with an estimated 85 percent of personal checking accounts. The continued dominance by a small number of firms, including those in which the British government own big stakes, and a series of scandals have fed anger toward British financial institutions.

Local banks have set aside more than $20 billion, in total, to repay customers who were sold insurance that was either not necessary or difficult to claim. Barclays and Royal Bank of Scotland have been caught up in British and American inquiries into rate-rigging. Lawmakers and British businesses have also voiced anger that the big banks are still not lending enough to local firms, hurting the wider British economy.

Despite efforts by British regulators to jump-start competition, including from the British retail giant Tesco, the country’s banking sector has remained stubbornly closed.

“There needs to be greater support,” said Omar Ali, head of the European retail banking advisory team at Ernst & Young in London. “Tough capital requirements and costly I.T. systems make it difficult for new entrants.”

The hurdles are high for even the most determined firms to get into British banking. It can take up to two years to get approval to start a bank. Widespread consumer apathy toward switching bank accounts adds to the difficulties for new firms trying to break into the market. Ambitious plans by several firms have also gone awry.

In April, the Co-operative Bank, a small financial institution, pulled out of a $1.2 billion agreement to buy 632 branches from Lloyds Banking Group. The deal, which would have made the Co-operative Bank a major player, fell apart after the firm was found to have a $2.4 billion capital shortfall.

“It’s a hazardous environment for any new entrant,” said Steve Davies, a retail banking partner at PricewaterhouseCoopers, in Edinburgh. “Customers in the U.K. market are disbelieving that it will be different elsewhere.”

For Metro Bank, which has 19 branches in southeast England and splits its lending equally between commercial and retail customers, the learning curve has been steep.

After deciding to enter the British market in 2008, Mr. Hill and his backers had to wait two years before their banking license was approved. Faced with stiff competition from well-established competitors for prominent commercial space, Metro Bank has had to wade through complex planning applications to get its branches approved. And analysts say that its financial products, which include checking and savings accounts and mortgages, are not the most competitive on the market.

“A lot of what Metro Bank has come up with, other banks have copied,” said Peter Hahn, a banking professor at Cass Business School in London. “It will be hard for Metro Bank to differentiate itself from its large competitors.”

The bank’s finances have remained on shaky ground as it invests millions of dollars to add more than 100 branches to its network by the end of the decade.

After raising around $400 million in three rounds of investment, Metro Bank, which still represents a small fraction of the British banking sector, has reported a combined loss of roughly $150 million since 2010. In contrast, many of Britain’s largest banks have returned to profit as they shake off the bloated balance sheets that helped lead to the financial crisis.

British regulators have also raised concerns over Mr. Hill’s past. Local authorities initially blocked him from becoming chairman of Metro Bank in 2010, though he eventually assumed the post this year after the firm increased the independence of its board.

Ever the optimist, Mr. Hill said he still expected his fledgling bank to report a profit next year, with deposits reported to reach $1.4 billion. Metro Bank will also probably raise $400 million more next year, either through an initial public offering or from existing investors, and is hoping for a market value of up to $14 billion.

“If I knew how hard it would have been to start, I wouldn’t have done it,” said Mr. Hill, who splits his time between Philadelphia and London, where he has a home in the city’s affluent Mayfair neighborhood synonymous with Russian oligarchs and Persian Gulf wealth. “If we don’t go for an I.P.O. in 2014, we’ll do it in 2016.”

Still, Mr. Hill sees taking on incumbent banks and other start-ups as part of the challenge of breaking into Britain’s financial sector.

“I don’t mind more competition,” he said. “People in Britain have had enough of their banks, but they don’t have a choice. That’s what we are offering.”