The bank that’s rising amid Europe’s ashes

The proud contrarian is Vernon Hill, whose London venture, Metro Bank, is such a smash that he’s just raised $200 million in fresh capital in a private placement, advised by industry veteran Meredith Whitney. The A-list of investors includes Fidelity, Moore Capital’s Louis Bacon, Steve Cohen of hedge fund SAC, and two New York real estate families, the LeFraks and Reubens. Plenty of others wanted to bet on this unlikely campaign to revolutionize British banking, but couldn’t get in before the coffers were full.

Hill launched Metro Bank in July of 2010 with $200 million in seed capital, backed by many of the same investors who contributed to the second round. Two years later, Hill is winning customers at an astounding rate with the model he pioneered in the U.S., and then exported. Over almost 30 years, Hill built Commerce Bank from a single branch in suburban Philadelphia into a major player in the northeast. He sold Commerce to Toronto Dominion (TD) in 2008 for $8.5 billion, then targeted a market where the competition was far more worn and stodgy than in the U.S., and where not a single new “High Street” bank — the Brits’ expression for retail banks — had won a license in 138 years.

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In Britain, half-a-dozen hidebound players have controlled the market for decades, including two bailed out by the government, Lloyds (LYG) and Royal Bank of Scotland (RBS). “The old models just don’t work,” says Hill. “They branches were run-down. They’d underinvested for years, and hadn’t had any competitive pressure to improve or innovate.” British banking, says Hill, is at an inflection point, and Metro is pointing the way.

So far, Metro Bank has established 12 branches in Greater London, and expects to open eight more by the end of this year. Hill says that the average U.S. branch does well to open 20 new accounts a month. Commerce waxed the competition by opening around 300. Metro’s branches are adding 750 per month. The flagship opposite the Holborn tube station has garnered $200 million in deposits, four times the total at the average mature American branch, and is still growing rapidly. “We’d never seen growth that fast at any of our Commerce branches,” marvels Hill. (See Fortune’s September 2010 profile, Vernon Hill is the best damn banker alive (Just ask him))

Why is Metro such a hit? For Hill, it’s all about building a great retail brand that happens to be a bank — Metro’s slogan is “Love your bank at last,” a reference to his obsession with super-fast, offbeat customer service. The Metro branches are spanking new, featuring giant, nostalgic murals depicting the neighborhood as it was a century ago, and Magic Money Machines that take your pence and spit out a receipt you take to the counter to exchange for pound notes. Dogs and cats are welcome, and restrooms available. Metro opens accounts and issues customers a debit and credit card, in just fifteen minutes.

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Hill predicts that Metro will reach $900 million in deposits by year-end. But that’s just the beginning. He’s aiming to open 200 branches in Greater London, and capture 5% of the market, about the share Commerce held in metro New York in the mid-2000s. That would swell the current level of deposits by around 90 times, to an estimated $80 billion, double the size at Commerce when it sold to Toronto Dominion. And for Hill, the big money in banking is in accumulating low-cost deposits. Says Meredith Whitney, “Vernon’s service-based model reinvented retail banking in America and is on the same path in Britain.”

Hill’s beloved Yorkshire terrier, Sir Duffield, or Duffy for short, plays a central role in Metro’s marketing. “Duffy shows up at openings, but he didn’t like the dog treats,” says Hill, who confesses that Duffy dines on rack of lamb and smoked salmon. So Hill is handing out three samples of treats to his dog-loving customers, and asking them to vote on which one their pets like best. He’ll offer the most popular treat at the branches. “The beauty of it is that the dogs are really voting,” declares Hill.

Londoners are voting too, by heading for those big glass cubes decorated with the giant red M for a treat they never expected, the festive, fun side of banking.