Wells Fargo reaches the end of its journey
Banks such as Citigroup, Deutsche Bank, Bank of America, Barclays and Goldman Sachs have been through the mill since the 2008 financial crisis. Wells Fargo, with its homely approach and uncanny ability to gain loyalty from customers, as supposedly proved by the number of accounts and payment cards that each held, enjoyed the last shining reputation.
It is now tarnished by the revelation that Wells Fargo’s winning ways with customers owed as much to the intense pressure it placed on employees to hawk products as to its friendly culture. Managers pressed ‘stores’ (Wells Fargo’s term for branches) to hit daily targets, leading to the faking of as many as 2m accounts. It has since dismissed 5,300 miscreant staff and been fined $185m.
If Wells Fargo is not what it promised, what does that say about the banking industry as a whole? Something troubling, I am afraid.
One bank looks much like another to most people, and none of them is very appealing. To aficionados, Wells Fargo was the exception. It has an investment bank but did not get subsumed by trading, or lose its shirt on subprime mortgages. Its brush with the 2008 crisis was to acquire Wachovia amid the financial turmoil, cleverly gaining itself a nationwide branch network.
It remained faithful to the strategy honed at Norwest, the Minnesota bank that merged with Wells Fargo in 1998. Mr Stumpf and Dick Kovacevich, his predecessor, learned about neighbourhood retail banking at Norwest and constantly extolled its virtues: it is unglamorous, even boring compared with Wall Street, but it offers stability.
Wells Fargo makes me feel nostalgic because it is the end result of how banks tried to reboot themselves in the early 1990s, when I first covered them. They were then trying to recover from credit crises in Latin America and US commercial property, particularly in California, and made inadequate returns on capital. They vowed to become more profitable and less cyclical.
In a way, the financial history of the past quarter century goes back to that moment. One set of banks, such as Deutsche, tried to raise profitability by expanding into investment banking, a higher margin, more exciting business. It worked for a while until the huge financial risks emerged.
Another set stuck with retail banking but tried to improve it. Their challenge was that they tended to make decent profits by taking in deposits and offering loans while economies were strong but go on to lose those profits and more when the loans went bad. The cure, they thought, was to diversify away from overreliance on lending.
Their customers had to be persuaded to hold not only loans and current accounts, but also credit cards, mortgages, insurance, investment accounts and other financial products. Wells Fargo became the exemplar: its retail customers now have an average of more than six products and it gains almost as much revenue from fees and commissions as from interest on loans.
Wells Fargo’s runaway success was always a bit mysterious: other banks tried to match the “king of cross-sell”, as Mr Stumpf once called it, but could not. “If it were easy, everyone would be doing it,” he boasted in 2010, promising in its ‘Vision and Values’ booklet, “We start with what the customers need, not with what we want to sell them.”
That was baloney. Under regulatory scrutiny, the bank found numerous cases of staff opening accounts for customers without telling them, or fooling them into taking credit cards. Even when there was no deceit, employees were pressed to gain bonuses by selling constantly; it was more a sales machine than a traditional bank.
The old lesson applies: if something seems too good to be true, it probably is. Mr Stumpf was suitably contrite under fire at the committee on Tuesday, promising to clean up the mess and emphasising that Wells Fargo has dropped product sales targets in its retail bank. The scandal was “against everything we stand for”, he pleaded.
Well, up to a point. Wells Fargo stood for cross-selling and, if it stops selling, it is left with a strategic hole. That is not only a problem for his bank, but for all those that tried to do the same. The model for making banking like retailing has run aground on the reputational hazard its sales culture created.
Banks cannot return to what they did before. The lending business is now even more under stress: as interest rates have fallen to near zero, loan margins have narrowed. Even if they wanted to wind the clock back two decades, the option is gone. Wells Fargo and its rivals must adapt uneasily, like investment banks after the shock of 2008.
Thus the expression on Mr Stumpf’s face as he endured his Senate interrogation: less one of disgrace than puzzlement that the story Wells Fargo’s bosses told for two decades no longer works. Time for a new one.
Published in Dawn, Business & Finance weekly, September 26th, 2016