Teflon Tim: You Can't Mess With Wells Fargo

Could the past two years have been worse for Wells Fargo (WF)?

According to an appropriately snarky Gonzo Banker post by Scott Hodgins, Wells' blunders are epic:

September 2016 - Disclosed that they created two million bogus accounts without customer consent to hit the bank's "eight is great" cross-sell targets. That fiasco cost them over $800 million in fines and legal settlements.

September 2016 - Wrongfully repossessed service members' cars. Some of whom were deployed overseas. Thirty million in fines and restitution.

March 2017 - Failed the OCC's community lending test causing "significant harm to customers."

February 2018 - Regulators limit WF growth due to "widespread consumer abuses and compliance breakdowns." 

April 2018 - Agrees to $1 billion in settlements for auto loan and mortgage abuses.

The spate of bad news led to Wells launching a nationwide ad campaign to repair its image.

And since then:

They admitted altering business customer data to address anti-money laundering compliance. Fined by the SEC for pushing inappropriate investment products. Finally got their financial crisis fine. Admitted to 400 wrongful housing foreclosures. And yesterday the Wall Street Journal reported that the OCC notified Wells that "the bank also has failed or isn't expected to meet deadlines on around two dozen technology-focused OCC regulatory warnings... that have been issued since 2014 or earlier."

How many people are in their public relations department? You would think not nearly enough.

Or is it?

I recently addressed a bank client's all officer meeting to discuss industry trends. As part of my comments, I presented the following table of New Jersey Deposit Market Share. I also included the USA deposit market share.

Wells maintained its market share from June 2017 to June 2018 in both New Jersey and nationwide.

In spite of the cascade of bad news, the bank ceded 72 basis points of deposit market share in New Jersey and only 10 basis points nationwide. And this was while they were imposed with a growth

restriction. No wonder why Teflon Tim is smiling in his investor relations pic. I thought it was the green tie. Luck of the Irish. That sort of thing.

So what is it about the bank that has allowed it to endure such bad news, such regulatory scrutiny, and such a mountain of fines and restitution? Superior technology? Nationwide network? The stagecoach?

Wells' challenges are a blinking light for a larger problem. Notice the bigger banks all held serve and maintained leading market share. As community banks, we have not developed a strategy to break through.

So the operative question is, should we be more focused on slaying dragons in our strategic and operating plans? Or, should we be content swatting at gnats? Because the dragon should be wounded.

What do you think?

~ Jeff 

To Branch or Not To Branch: Here Is The Answer

During periods of uncertainty lies opportunity. Vernon Hill, legendary leader of the former Commerce Bank in Cherry Hill, New Jersey, took advantage of the last time bankers were contemplating the future of branching by beating them over the head with his high profile and rapidly expanding branches. Can another Commerce Bank eat our lunch this time around?

Only if you develop a decade long strategic plan that maps the decline in branch prominence. If you are a shorter term strategist, and you want to grow, then branching remains on the table because it remains high in importance when customers are asked why they bank where they do. Even if they do not frequent their local branch, they tend to bank where a branch is nearby.

But what kind of branch? The Financial Brand did a showcase piece on innovative branch designs. I don't know which one is best, if any, but do know that the answer to proper design lies in your target customers as identified by your strategy. So, the branch question, be it design, location, and staffing, should be driven by the type of customers you are targeting, as identified in your strategy. If you haven't identified your target customers in your strategy, read no further and go do it.

But for those that know who they are targeting, the branching decision should be built on analytics. Branches represent such a significant expense, and average deposit size to achieve desired profitability has gotten so large, that we can no longer decide to branch at a location that is convenient to one of your directors.

Here are what I believe to be the critical pieces of information in determining where to branch:

1. Where are your customers now? Banks often have concentrations of customers that are in towns where they have no branches. This could be a significant starting base to grow your branch. I attended a banking conference recently where the presenter said your best source of new customers are the neighbors of your existing ones. If you have a solid foundation of households within a geography, that is a great start for a successful branch. Note I'm not suggesting branching just to bank existing customers, as that would erode overall profitability. But existing customers are the seedlings for new customers. So identify where your customers are.

2. Are there enough opportunities to bank your target customers in the new market? If you specialize in banking doctors and dentists and there are paltry few in the new market, I'm lost why you would consider going there. The exception may be that your niche rests on the loan side of the business, and funding those loans evolves from a more general strategy to generate funding. But if you can't dominate your niche in a certain geography, consider going somewhere where you can.

3. Is the market growing? Household and business growth demographics are pretty easy to obtain, either through government sources or systems such as your MCIF. Deposit growth and market share, and number of branches in a market (see tables) are available via the FDIC website. Are deposits increasing? Are competitors struggling? Are average deposits per branch increasing and of sufficient size to achieve your desired level of profitability?  

4. Are bankers available to staff the branch? In nearly every strategic planning session I attend Senior Managements place great emphasis on successful strategy execution on their people. There is no substitute to having the type of staff with the greatest likelihood of successfully executing your bank's strategy in your new market. You want to fail? Put no emphasis on branch staffing. You'll fail. I guarantee it.

5. Is a reasonable site available. I'm a realist. You can set your branch up for failure if you don't find a reasonable site. The term reasonable is in the eye of the beholder, but if you are tucked in the middle of a dying strip mall, that may not bode well for your visibility and your brand. Find a location where your people can succeed.

6. Can you de-branch painlessly? This is a new question for your branch analysis. There will come a time when your contemplated branch, and other branches in your network, will be unnecessary. Customers will be accustomed to banking online and/or via mobile, advice and problem solving can happen via the phone or in-person visits to the customer, and the psychological attachment to the branch will be gone. Can you close shop without incurring significant expense? 

I don't think branching is dead. But I do think that the need for marquis, high cost branches is waning, and smaller and more tech savvy branches will emerge as the norm. I also think staff per branch will decline, but capabilities per staffer will increase. The importance of getting your next branch decision right is critical to successful execution of your strategy. Don't let your director bully you into putting one near his/her house.

How do you think branching decisions should be made?

~ Jeff

Banks Versus Credit Unions: Much Ado About Nothing

Credit Unions don't pay taxes! They're trying to steal our business customers!

I often quote Sun Tzu from his over 2,000 year old book, The Art of War. One of my favorites: "If you know the enemy and know yourself, you need not fear the result of a hundred battles." The frequent and resource sapping waling about credit unions tells me that banks don't know their enemies, umm, competition.

Last year I attended the CUNA Government Affairs Conference (GAC). By the way, it was the trade show beyond all trade shows. Clearly credit unions put heavy resources into lobbying. So I will give banks that point. We had a booth, and my company's tagline is "helping banks perform better". We like the alliteration, and use the word "banks" in a generic way, like Kleenex.

But one would think we would hear about it from CU executives and trustees. And we did hear some quips. But one CEO opined that the rift between banks and CUs was greatly exaggerated by trade associations to keep the masses engaged. I believe her.

Why? Take my home state, Pennsylvania, for example. We do business with both banks and CUs in the state. Admittedly, mostly banks. And we hear plenty about credit unions in strategy sessions. But I pulled deposit market share data for the state, and the results are telling (see table).

Credit Unions boast a 9.5% deposit market share in the state, or $33 billion out of $345 billion total. There are 497 credit unions headquartered in PA, but 447 of them are less than $100 million in deposits (ok, shares for you CU technocrats). All PA CUs combined have the same in-state deposits as Wells Fargo, and half that of PNC. There are only two CUs in the state's top 20 in deposit market share.

Does the banking industry dedicate disproportionate strategic decision-making, marketing and lobbying resources fending off CU competition? Because when I look at the above table, it's clear where a community bank's strategic focus should be. And it shouldn't be on the Locomotive & Control Employees FCU in Erie.

What is this table telling you?

~ Jeff