With the Wells Fargo & Co. dummy accounts mess we finally have a Midwestern bank scandal.
Wells Fargo may have a California headquarters address and carry a California brand name, but scrape off the red and yellow paint of Wells Fargo and you will see the blue and green of Norwest Corp., the Minneapolis company that took over the underperforming Wells Fargo in 1998 and then kept basically only the Wells name.
The strategy and culture of a bank that had to fire 5,300 employees in recent years for secretly creating at least a couple of million accounts in their customers’ names, leading to $185 million in fines, all of that was created here, by Minnesotans working just down the street.
It’s hard to overstate just how odd this Main Street bank scandal is because a bank fraud story is almost always a version of powerful insiders getting caught gaming the system to make themselves even richer.
Remember the Keating Five in the late 1980s? Now that was a bank scandal, when five distinguished U.S. senators muddied their own reputations by running interference with regulators for a wealthy real estate operator who then finally succeeded in flying his big savings and loan into the ground.
The financial crisis of 2008 could be described as one massive bank scandal, and since then the new ones that have come along have been exotic Wall Street affairs, like the London Whale losing more than $6 billion trading derivatives at JPMorgan Chase & Co.
Then there was the much more serious case of bankers rigging a set of global interest rates called LIBOR. It was another story that seemed like pure inside baseball, as even people with years in the banking business may not be able to precisely define what a LIBOR is or how it is set.
The tools of fraud at Wells Fargo were as simple as they get in banking in 2016, things like credit cards and checking accounts. They weren’t used by traders or bank executives but by front-line employees, “team members” in Wells Fargo-speak, maybe working in a tiny branch “store” in a strip mall.
It may seem odd that Wells Fargo calls a bank branch a store, but not if you know anything about the old Norwest growth plan. What’s remarkable is how little that Norwest strategy has changed in three decades.
Wells Fargo publishes “The Vision & Values of Wells Fargo” on its website, the latest featuring CEO John G. Stumpf. It’s pretty much the same as the one produced 10 years ago that featured longtime CEO Richard Kovacevich. He had come to Minneapolis in 1986 as Norwest’s new vice chairman and became CEO in 1993, the year the company’s vision and values brochures started appearing.
The Norwest thinking laid out in these booklets was that bankers worry too much about loan margins and costs when they try to increase earnings, so at Norwest the goal would be increasing revenue. The best way to do that was to sell more financial “products” to the customers Norwest already had.
It’s a compelling business idea. Peeling new customers away from a competitor is both hard to do and costs a lot, too. It’s so much easier to get more revenue from a customer who already routinely comes into the store.
As Kovacevich noted in 2006, there was abundant growth potential just in the existing Wells Fargo customer base. He pointed out that only one in five retail banking customers with a Wells Fargo mortgage also had a Wells Fargo home equity line of credit. Only one in three customers carried a Wells Fargo credit card.
On average, he pointed out, an American household had 16 financial products of one kind or another, and here Wells Fargo customers only had an average of five with Wells. That’s why one of the key strategic initiatives outlined then was what the company was calling “Going for Gr-Eight.”
Getting to great meant that the bankers needed to sell, and then sell some more, to move the average number of Wells Fargo products per customer from five to eight.
As to how the employees were to achieve that kind of sales growth, the company was pretty upfront about that. As another old Norwest expression put it, “we inspect what we expect.” If the bank wanted employees to pitch other products to customers they met every day, then those sales efforts would be very closely monitored.
How closely inspected? Now daily sales for each branch and each sales employee are reported and discussed by Wells Fargo district managers four times a day, beginning at 11 a.m. and finishing at 5 p.m., as outlined in the 2015 legal complaint that the city of Los Angeles brought.
The efforts to game the system that resulted were so common that employees named them, such as “sandbagging.” This meant accumulating a bunch of customer account applications and hanging onto them, to be opened later to meet the sales quota.
Another practice was “pinning,” the practice of assigning a personal identification number to a customer ATM card without letting the customer know about it. One of the reasons to do this was to allow employees to later impersonate customers on Wells Fargo’s computers, signing them up for online bill paying or other services they hadn’t asked for and didn’t know they got.
There were signs long ago that Wells Fargo’s strategy to “cross-sell,” as it was called, was running out of head room. The Wall Street Journal noted in 2011 that other big banks had emulated what Wells Fargo was doing, maybe informed by the case studies on Wells’ cross-selling that were easily available online for use at business schools.
For the last few years, the average number of products per customer in Wells Fargo’s consumer banking business has remained stuck at a bit more than six.
As part of its damage control efforts, Wells said it will suspend sales goals. Tweaks to a sales incentive and management structure that could produce a PR mess this big seem long overdue, of course, but there’s been no indication that the company has any plans to abandon its core strategy. Its chief financial officer assured an investor audience last week that any changes would be done “in a way that protects our business model.”
Cross-selling as a term is likely to go out of use, at Wells Fargo and across the industry, but the strategy makes as much sense as it did at Norwest 30 years ago. Don’t be surprised if in a few years, case studies start appearing on what Wells is doing to sell more, but maybe with a name something like “needs-based marketing.”