Opportunistic financial marketers at banks and credit unions across the U.S. should be feasting on consumers' rage at the once-venerated banking brand.
To say Wells Fargo screwed themselves is an understatement. The blowback over the cross-selling scandal and its impact on the Wells Fargo brand has been massive. They have been getting punched by everyone, and in every direction, and deservedly so.
All the bad news has taken a heavy toll. Account openings have fallen off a cliff. Openings of new checking accounts plummeted 44% in October compared to the same month a year earlier.
According to a study released by cg42, roughly 14% of Wells Fargo customers say they have decided to switch banks over the phony accounts. And more than half of non-Wells Fargo customers surveyed say they are unlikely to join the bank vs. 22% previously.
In cg42’s research, 60% of respondents said they had a positive impression of the Wells Fargo brand prior to the scandel. But afterward, that number sank to just 24%. Negative brand perceptions increased from 15% to 52%.
Another study from SurveyMonkey found that downloads of the Wells Fargo mobile app declined 7.7% in the 30 days following the scandal vs. the previous 30 days.
“While the lion’s share of Wells Fargo customers surveyed said they were not directly reported being affected by the scandal, it doesn’t matter,” said Steve Beck, founder of cg42, in a phone interview with HITC. “The breach of trust the scandal created has fundamentally changed the way that they think about their institution, the way they think about the bank.”
In cg42’s analysis, Wells Fargo stands to lose as much as $99 billion in deposits, up to $8 billion in revenue and a customer base that could dwindle by up to 30%.
These results “paint a bleak picture” for Wells Fargo and suggest the “full financial impact of the scandal is yet to be felt,” cg42 wrote in its assessment of the situation.
Wells Fargo reports that customer visits with bankers at branches fell 10% for the month of September versus the same period a year earlier. The number of new credit-card applications also dropped 20% during this period. Mortgage referrals from Wells Fargo’s retail banking unit plummeted 24% between September and August 2016; retail banking referrals had accounted for about 10% of the bank’s mortgage originations.
This seriously depressed the bank’s profits generated by Wells Fargo’s community banking arm — down a hefty 9.4% for Q3 2016. The contributions to the bank’s overall profit from the retail division are significant, amounting to $3.23 billion of the total $5.64 billion in net profits Wells Fargo reported for the quarter.
And as if thousands of angry consumers threatening to close accounts isn’t bad enough, the cross-selling fraud has also cost Wells Fargo some very large, institutions relationships as well. For instance, the state of California has severed its ties with Wells Fargo. Prior to making their decision, California had done about $1.65 billion worth of trades over an 18-month period, but those revenues will now disappear, since the state will no longer be using Wells Fargo as a broker-dealer for buying securities. California won’t buy any more of their debt securities either, worth an estimated $800 million. And California will not be using Wells Fargo to underwrite bonds, a move that could cost Wells millions of dollars in banking fees because the state is the largest issuer of municipal debt in the country.
Not long after, the state of Illinois pulled its business from Wells Fargo, which state Treasurer Michael Frerichs said will result in the loss of $30 billion in investment activity. The city of Chicago also pulled its $25 million account.
That’s not all. It gets uglier. Shareholders are suing Wells Fargo for a 9% drop in the bank’s stock. The Labor Department has launched an investigation into the bank’s practices. California’s attorney general is conducting a criminal investigation into whether employees at San Francisco-based Wells Fargo bank stole customers’ identities. There’s even speculation that ex-CEO John Stumpf, who already lost his job and forfeited over $40 million in compensation over the controversy, may also face criminal charges.
Two former Wells Fargo employees are pursuing a class-action lawsuit against the bank. The suit is being filed on behalf of staffers who were “either demoted, forced to resign, or terminated,” for failing to meet “impossible” quotas. The lawsuit is seeking at least $2.6 billion in damages.
The HR impacts from the cross-selling scandal cannot be ignored. Dan Kleinman, a consultant who has worked with Wells Fargo since the 1970s, said it could take the bank 3-5 years to rebuild its sales and management structures — something he described as a “Herculean task.”
Retraining could involve as many as 100,000 staffers at more than 6,000 locations. And then there are issues surrounding recruiting and retaining talent.
“The question is whether the type of folks you want as employees will even work for the bank,” Kleinman said. “Its reputation is soiled.”
Does Cross-Selling Deserve to be Demonized?
Everyone has lined up to take their shots at Wells Fargo.
“Look at Wells Fargo,” said Hillary Clinton at a rally, as the audience booed. “Really shocking, isn’t it? It is outrageous that eight years after a cowboy culture on Wall Street wrecked our economy, we are still seeing powerful bankers playing fast and loose with the law.”
“We should build on the Dodd-Frank financial reforms and go even further because Wall Street can never, ever be permitted to threaten Main Street again,” she added.
That sounds ominous for a banking industry that has complained desperately to lawmakers about the crushing regulatory burden imposed on them following the financial crash caused by the housing bubble. Will there be even more regulations coming?
As easy as it may be for politicians to pick on Wells Fargo, not everyone agrees that cross-selling deserves to be demonized.
“This has been blown out of proportion,” said Charles Wendel, president of the consulting firm FIC Advisors. “Banks have to do cross-selling because there are only so many places from which they can generate revenue.”
Stephen Biggar, an analyst at Argus Research who covers Wells Fargo, echoes that sentiment. “Wells obviously violated some trust with customers,” he said. “But that doesn’t mean the premise of cross-selling is faulty.”
Writing for the Guardian, banking analyst Suzanne McGee said there’s nothing inherently wrong with cross-selling as a business strategy. “In fact, it’s eminently logical — and can even be good for customers — to make them aware of products or services that might be out there and fit their needs,” she wrote. “But it only works well when it’s done carefully and on a customized basis.”
Even Richard Cordray, director of the Consumer Financial Protection Bureau, defended the practice of cross-selling when he announced the enforcement action against Wells Fargo. Cordray called it a “common approach” that, when done right, “should lead banks to devote more attention and resources to strong customer service, since the easiest and best way to earn more business from existing customers is by giving them superior value and excellent service.”
What’s The Right Strategy for Banking Providers Going Forward?
Considering the fallout Wells Fargo has faced — and the intense public scrutiny placed on cross-selling — some banks and credit unions have expressed reservations about their cross-selling strategy. But pulling back would be a big mistake; banking providers simply can’t survive without increasing the number of products their customers hold with them.
“Cross-selling has to be properly done in order for banks to make money,” said Mike Moebs, CEO of banking research firm Moebs Services.
So you can’t abandon cross-selling. In fact, the situation creates multiple opportunities for anyone offering banking services whose name isn’t “Wells Fargo.” For starters, financial institutions can tell customers about their approach to cross-selling.
But more importantly, bank and credit union marketers should smell blood. Wells Fargo is vulnerable, and their brand is suffering. There is tremendous opportunity to target Wells Fargo’s customer base.
Credit unions, community banks and regional banks alike stand to gain the most from Wells Fargo’s woes. cg42 projects they could see a deposit influx of $39 billion. Bank of America, Citi and Chase, could also benefit from Wells Fargo’s troubles.
Perhaps the craziest part of Wells Fargo’s warped cross-selling strategy has to do with the fundamental premise behind “sticky services.” Nearly everyone in the banking industry agrees that cross-selling is an integral component to profitability — the more products and services you have people using at your financial institution, the more likely they are to stick around and make you more money. Switching banks, changing all your automatic bill pays and updating your payment information with various creditors is a major hassle, so banks want to sink their hooks into you as deep as they can. But what good does it do if a bank enrolls people in “sticky services” that they don’t even know about? Why would Wells Fargo give incentives to staff that would yield phony results? A customer with 6.8 services isn’t 2.2 times more likely to remain a customer employees fraudulently opened 5.3 of those services without their knowledge. Ridiculous… Wells Fargo lost sight of what a smart cross-selling strategy is all about. They incentivized employees for the wrong things, in the wrong way and for the wrong reasons.
Bottom Line: Cross-selling done in the right way for the right reasons makes sense… and money. But tacking on useless, unprofitable additional services — that consumers don’t know they have! — to hit an arbitrary goal will not help any financial institution cultivate relationships, nor achieve greater profitability.