Wells Fargo: What It Will Take to Clean Up the Mess

A series of scandals has sparked a crisis of confidence in Wells Fargo, the nation’s third-largest bank whose roots harken back to the Gold Rush era when it provided financial services to miners in the Wild West. The most recent scandals — which included falsifying and accessing without authorization more than 2.1 million deposit and credit card accounts — has led to one of the biggest stains on the bank’s reputation in its 165-year history.

Last fall, Wells Fargo agreed to pay $185 million to regulators to settle charges of manipulating and creating false accounts in its Community Banking division. It fired 5,300 employees who were implicated, as well as the CEO and other executives. In late July, the bank admitted that it took out auto insurance on behalf of 570,000 car loan customers without telling them, resulting in higher payments and some vehicle repossessions. Its plan to make customers whole would cost $80 million, plus any fines.

The fallout continues. Last week, Wells Fargo disclosed in a Securities and Exchange Commission filing that it is expanding its probe of these falsified and manipulated accounts and warned that there could be a “significant increase” in the number of compromised accounts. Also this past week, it agreed to pay $108 million to the government to settle a 2006 lawsuit alleging that it overcharged veterans in refinancing loans. This week, the bank is facing new charges that it did not refund insurance premiums when consumers paid off their auto loans early, according to The New York Times. Multiple lawsuits were filed.

“It is a very serious set of violations that calls into question whether Wells is in fact too big to manage well,” says Peter Conti-Brown, Wharton professor of legal studies and business ethics. “The problem is either outright fraud from the highest levels or a broad indictment of the Wells Fargo governance system.… The idea that Wells management initially advanced — that this was just a few bad apples — doesn’t add up anymore.”

The bank said these scandals could cost the company $3.3 billion more than what it anticipated, according to an SEC filing. Wells Fargo can afford to pay: It reported 2016 net revenue of $88.27 billion and net income of $20.4 billion or $3.99 per share, with nearly $2 trillion in assets. But the damage goes beyond finances.

“The fine is not the real damage to the company,” says Wharton accounting professor Wayne Guay. “The damage to the company is the [negative] publicity that they have received over the last several months — the CEO got fired, several executives got fired, several executives had to give back millions of dollars in compensation. There was a serious overhaul in the organization and presumably there’s been some goodwill that has been seriously damaged with respect to customers and shareholders.”

Indeed, the scope of wrongdoing is troubling — in the fake accounts debacle alone, thousands of employees had engaged in improper activities that affected millions of accounts. “This offense is clearly pretty egregious. We have not seen similar things in similarly large banks in the U.S. yet,” says Wharton finance professor Itay Goldstein. “Maybe this is just the first one to be revealed and others will follow. We can only wait and see. It definitely seems like there is a serious problem in Wells Fargo and they need to be working hard to fix it.”

Since the scandals emerged, the market has been punishing the bank. “Before the crisis, Wells was the most valuable bank in the world,” says Wharton finance professor Richard Herring. “Since then, its price-to-book value ratio has fallen by 31%. Moreover, Wells has been losing market share to other banks not tainted by this scandal.” In February, the number of checking accounts opened at Wells Fargo fell by 43% from a year ago while credit card applications declined by 55%, the bank reported.

Herring adds that Wells Fargo’s board was reelected in the spring by the “thinnest margin in recent history. Indeed, if the board had not gained the support of Warren Buffett, the single largest shareholder in Wells Fargo, many members of the board would not have been reelected.” Shareholders are right to be concerned about the board’s failure of oversight. “No bank wants to be caught up in this kind of scandal,” he says. “It undermines confidence, which is the most important asset of a bank.”

A ‘Controlling’ Executive

Founded in 1852 as Wells Fargo and Company, the firm provided financial services by steamship, stagecoach, Pony Express, railroad and telegraph. It served pioneer miners, merchants and ranchers in the West — buying and selling gold, offering money orders, traveler checks, fund transfers and others. Wells Fargo’s legendary stagecoaches, which remain part of its logo, at one point traversed 2,500 miles from California to Nebraska and Arizona to Idaho. By sticking to its roots in the West, it survived the Great Depression and two World Wars. The bank focused on consumer banking, auto and home loans as well as small business lending and did not get into complex securities.

“It is a very serious set of violations that calls into question whether Wells is in fact too big to manage well.”–Peter Conti-BrownSince 1960, Wells has embarked on a merger and acquisition spree that enabled it to expand beyond the San Francisco area. Among its biggest deals were the $11.6 billion takeover of First Interstate Bancorp in 1995, the $31.7 billion merger with Norwest and the $15.1 billion acquisition of Wachovia in 2008, which gave Wells Fargo a major presence coast-to-coast. The purchase of Wachovia gave Wells Fargo an investment banking business but also brought headaches. In 2010, Wells Fargo agreed to make loan modifications worth $2 billion to California homeowners who took out adjustable rate mortgages from Wachovia and World Savings but could not afford payments once interest rates reset. Wachovia bought World Savings prior to its sale to Wells Fargo.

Today, Wells operates more than 8,500 locations and boasts an ATM network of 13,000 with offices in 42 countries and territories. It employs 271,000 people full time and serves one in three U.S. households, according to an August 4 SEC filing. Wells is also one of the most diverse U.S. banks: Nine of the 15 directors on its board are women or minorities. And until now, it had enjoyed a relatively solid reputation. “Given the very surprising scandal from a team that was held in the highest regard and trust, we believe that providing more disclosures beyond very high level metrics is one of the changes that will give more confidence,” states a recent JPMorgan Chase analyst’s note.

So what really happened at Wells Fargo? Thus far, the most detailed explanation comes from the bank itself — on the biggest scandal of falsifying accounts. It hired a law firm to conduct a probe and the results were published in a report in April. The board has expanded the scope of the investigation and the review is expected to be completed in the third quarter.

According to the April report, a confluence of factors caused the wrongdoing. Wells has a culture of independence: Its internal mantra to division heads is to “run it like you own it.” The decentralized set-up ensured that control resided in the hands of division chiefs, who presumably knew what their market needed because they were closest to them. But it also became a weakness because autonomy led to wrongdoing — with poor oversight from the corporate office until it was too late.

In the fake accounts debacle, wrongdoing occurred in the Community Banking division, where employees were given tough sales goals to meet. Some low-level managers also encouraged workers to create bogus accounts, the report said. Employees were afraid they would get fired if they missed their targets, even though senior managers privately believed only 50% of the regions could meet them. Some managers would call employees several times a day to check on their sales.

The head of the Community Banking division was Carrie Tolstedt, whom the bank described as a “controlling manager who was not open to criticism” and “notoriously resistant to outside intervention and oversight.” But she had the ear of CEO John Stumpf because her unit drove at least half of bank revenue.

Stumpf was a champion of decentralization and cross-selling of additional products to existing customers. Indeed, Wells Fargo was known for its above-average ability to cross-sell products and services. Ironically, this prowess turned out to be its undoing when combined with an aggressive sales culture. “They were the envy of the banking industry for their ability to cross-sell products to their customers,” Herring says. “It would have been productive for the board to inquire why they were so successful at cross-selling, but I suspect this got little to no board attention because it was assumed to be a strength based on the Wells culture.”

“No bank wants to be caught up in this kind of scandal. It undermines confidence, which is the most important asset of a bank.”–Richard Herring

As for Stumpf, the bank said he didn’t move quickly or far enough to change errant sales practices, which first came to light as far back as 2002. Instead, these practices were seen as “tolerable,” “minor infractions” and “victimless crimes” that were handled by increased training, stepped up detection of wrongdoing and firing of offenders. But he didn’t make systemic changes.

Stumpf “failed to appreciate the seriousness of the problem and the substantial reputational risk to Wells Fargo,” the report said. The board pointed out that it first noticed these sales practices as a “noteworthy risk” in 2014, the year after a Los Angeles Times expose. In 2015, the city of Los Angeles sued the bank. Federal probes followed that led to a settlement in September 2016.

Wells Fargo fired Stumpf (Morningstar’s 2015 CEO of the Year) and Tolstedt, plus other senior executives. It has taken back $41 million in unvested equity awards from Stumpf and $19 million from Tolstedt, and canceled their bonuses. Wells Fargo also took away Tolstedt’s $47 million in outstanding stock options and Stumpf’s $28 million in incentive compensation. However, both still leave the bank with tens of millions.

As for the auto loan insurance debacle, if the fees led to more revenue for the bank and perhaps bonuses to officers, then they “blunt the initiative to verify that the client is not already insured elsewhere,” says Krishna Ramaswamy, Wharton professor of finance. Further, when bank officers know the processes, rules and products better than the customer, it leads to the possibility of abuse because the client doesn’t know enough to challenge what they’re told, he adds.

Wells Fargo’s board also shares the blame. Abuses in the car loan division were known by the board in 2016 but they were disclosed only last month. “It wasn’t disclosed for over a year, only after it becomes apparent that lawsuits and The New York Times (which broke the story) will reveal the details,” says Wharton accounting professor Daniel Taylor. “Back in September 2016, Wells just settled the fake accounts scandal, and management also had this issue on their hands.” If directors were aware of the issue in 2016 and did not disclose it, he says, directors may have breached their fiduciary duty to shareholders.

Jail Time for Executives?

To the public, it might seem that Stumpf and other implicated executives got off easy despite the scope of the wrongdoing. Would putting executives in prison curtail bad behavior? “Undoubtedly, it would,” Herring says. “Unfortunately, decision-making within banks is often so complex that it is difficult to identify the specific individual who should be held accountable.” Adds Guay: “Getting the CEO fired is one thing; finding them criminally responsible for that crime is another issue entirely. In the Wells Fargo case, you would have to show basically beyond reasonable doubt that the CEO was aware of what was going on.”

If prosecutors go after a CEO, he or she will hire the best lawyers to fight a case in court that could drag on for years, says Guay, who is an expert witness on corporate governance and executive compensation cases. And in the end, prosecutors might not even win. That’s why the government prefers to settle quickly with companies caught in improper activities — and companies usually also pay without admitting wrongdoing. To admit guilt is dangerous for companies because it opens the door to potential other litigation down the road.

“It’s not as sensational as putting people in jail and fining companies, but it’s a lot more effective.”–Wayne Guay

“For non-lawyers among us, this is a frustrating outcome,” Herring says. “The costs of pursuing a prosecution are so heavy and, given uncertainty about rulings by judges and juries, the expedient course of action is to reach an agreement in which the corporation does not admit having violated the rule but, nonetheless, pays a substantial penalty or restitution. The public sees through this convention and so it does not protect the bank’s reputation, but it certainly does leave the public with the impression that justice has not been served.”

At least, oversight of financial firms has intensified. Herring says all major institutions must now show three lines of defense: those actions responsible for ensuring compliance with rules and policies at the line of business and those responsible for independent risk management oversight, as well as creating an independent internal audit function to monitor the effectiveness of the first two lines of defense. “These three lines of defense are monitored carefully by the bank regulatory and supervisory authorities.… The hope is this heightened oversight within banks and by regulators will deter this kind of bad behavior.”

Taylor says that the frequency of corporate scandals shows the need for stronger consumer protections. “There have been recent calls for relaxing consumer protections and defunding consumer protection agencies,” he says. “It’s pretty clear, without getting into specific protections, that there is a need for consumer protection agencies.… Without those protections, there will be significant customer abuses.”

Taylor says the banking industry has been consolidating and getting less competitive, further opening the door to consumer abuses. He also notes that fines should be higher because repeat offenses imply the penalties are not a sufficient deterrent. If a company repeats offenses in the same area, it suggests that there is a clear corporate culture problem. “If the problem is systemic, then a CEO resignation isn’t going to change the culture, especially if the replacement is internal,” Taylor says.

A Better Way

Guay sees a better solution: “If we’re going to try to think about how to prevent these kinds of things from happening in the future, to my mind that’s the place to focus (executive compensation and corporate governance structures). Relying on regulators, relying on the court system, those things might have some marginal benefit, but making sure the board of directors has the right internal controls, the right risk management and corporate governance in place, that’s going to be the single biggest, most important thing we can do to make sure that these things don’t happen.… It’s not as sensational as putting people in jail and fining companies, but it’s a lot more effective.”

“It definitely seems like there is a serious problem in Wells Fargo and they need to be working hard to fix it.”–Itay Goldstein

The board’s main tools are structuring and setting compensation for senior executives and firing managers who don’t live up to board expectations, Herring says. Executives then are responsible for setting up incentive systems and oversight to ensure that employees are acting in the best interest of the bank. While this system of governance can break down at different points, “it is generally quite resilient and adaptive in responding to errors.”

Boards are quite effective in dealing with problems once they are identified, and business units that suffer losses receive heavy scrutiny, Herring says. “A more insidious problem is that boards seldom focus on areas that are quite profitable, but they should. The only way the bank can be more profitable in one line of business consistently is if it really has some advantage that no other competitor can gain, has had an incredible string of luck or is doing something unethical or implausible.”

Wells Fargo’s board is trying to right the ship. It named COO Tim Sloan to the CEO job and replaced two directors. The bank’s 15-member board now has 14 independent directors and one insider, Sloan. The roles of CEO and chairman have been separated, and by-laws have been changed to make sure the chairman is an independent director. Wells Fargo also ended the sales program at the Community Banking division — linking incentive compensation to customer service instead of sales. It is centralizing the control functions and has created a new Office of Ethics, Oversight and Integrity. Also, whenever a new account is opened, the customer gets an email notification. Credit card applications also will need documented consent, the bank said.

Will these measures work? Time will tell but at least Wells Fargo is taking the right steps to clean up the mess. “The board of directors is making a very conscious decision to try to put better internal controls in place,” Guay says. “And that’s where you would expect these things to get started — the board of directors.” When unsavory activities happen in a company, people get fired or replaced and an internal probe ensues. “The board of directors have to pick up the pieces and move forward.”

Why the Wells Fargo Hearing Raises More Questions Than It Answers

Wells Fargo chairman and CEO John Stumpf’s testimony last Tuesday before the Senate Banking Committee on the fictitious-accounts scandal at his bank raises disturbing questions for the bank, the banking industry and affected consumers. Earlier this month, the company said its subsidiary Wells Fargo Bank will pay $185 million in settlements over admissions that its employees had created fictitious customer accounts without the parent firm’s knowledge over the past five years. They had created about two million such accounts, ostensibly to meet sales targets and earn bonuses.

Some suggest that the bank’s profit model may be to blame for encouraging such practices. Now, the spotlight is on how the financial services industry should structure employee incentives, the role of the Consumer Finance Protection Bureau (CFPB) and the impact on Wells Fargo customers whose credit scores stand compromised. With the bank firing some 5,300 employees that were involved in the fraud, the debate moves to whether its corporate culture is to blame, or if those employees were indeed guilty of “wrongful sales practice behavior,” as Stumpf told the Senate committee.

According to Wharton professor of legal studies and business ethics Peter Conti-Brown, the Wells Fargo episode raises a basic question: “How profitable do you want the banks [to be] if they’re providing such a basic public-utility type service of just parking your money – in the way that we might think of an electricity company or a gas company — as opposed to a profit center?”

Michigan State University professor of economics and international relations Lisa Cook said the Wells Fargo scandal could upend existing bank profit models. She noted that in 2015, the financial services industry collected $11 billion in overdraft fees, or 8% of total profits, citing a CFPB report. Similarly, banks would covet other customer fees, she added. “[The] question is how the profit function might change if these types of practices were eliminated?”

Conti-Brown and Cook discussed these and other questions on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)

Here are five key takeaways from their discussion:

‘Unsympathetic and Unaware’: While Stumpf apologized for his bank mistreating its customers in his Senate testimony, Cook gave him a “D-minus” for his performance at the hearing. She said he was “unsympathetic and unaware and passing the buck” in responding to the charges against his bank. “Most disturbing was that he profited tremendously during the period when the scheme was happening,” she added. Between 2012 and 2015, Stumpf received more than $155 million in performance bonuses, according to a study by the Washington, D.C.-based Institute for Policy Studies.

Wrong Culture, Misplaced Incentives? Conti-Brown noted that he was “annoyed … the most” when Stumpf attributed the problems to a group of rogue bank tellers and that their actions did not reflect the bank’s corporate culture. According to Cook, if 2% of the bank’s workforce was involved in wrongful practices, they cannot be described as merely rogue employees. “There had to be a person at the top who knew about this,” she said, adding that the bank fired several whistleblowers that exposed the wrongful practices.

Cook also faulted Wells Fargo for allowing Carrie Toldstet, its former head of retail banking who oversaw those practices, to retire this year-end with nearly $125 million in severance payments. “All of this is suspect. It just smells, it just stinks. Being allowed to retire doesn’t suggest accountability or responsibility at the highest levels of management.”

Conti-Brown also called for bank managers to revisit how they structure incentives for employees. “In the banking industry, especially in consumer banking, we don’t have a good handle on this. Wells Fargo didn’t provide the correct solution.”

Three Unanswered Questions: Conti-Brown raised other questions: For one, does Toldstet’s retirement indicate a change of direction in the company’s practices, away from the cross-selling that helped create the fictitious accounts? “Toldstet’s retirement was not voluntary; she was counseled out,” he noted. “She was allowed to retire precisely to avoid call-back of her compensation.” (Wells Fargo critics have since demanded that the bank claw back the compensation paid to employees who indulged in wrongful practices.)

“Why did this happen at all when we created the CFPB to eliminate this kind of thing? [And] would this have continued to go on?”–Peter Conti-Brown

Second, what is the total number of Wells Fargo employees who were involved in cross-selling activities? “Not all the staff (about 220,000) are personal bankers,” he noted. “To get the denominator here, we need to know what number of people is engaged in the business of cross selling and then what number of people faked these two million accounts.”

Third, why did bank management not see red flags when some branches performed better than others? “Rather than investigating how could it be that [some] branches are such outliers compared to the rest of the company, they started celebrating it and sending people to learn from them,” he said. “It just does not pass the smell test.”

Impact on Credit Scores: According to Conti-Brown, the impact of the fictitious accounts “will be marginal” on the credit scores of the affected Wells Fargo customers, but the costs will be high for those people “who were at the cusp of between excellent and good.” He predicted that those who refinanced a house or a car loan will incur additional fees that could run into thousands of dollars. “There was real harm done to these people through the manipulation of credit scores.”

Revisiting the Regulator’s Role: Conti-Brown wondered if the CFPB’s existence “facilitated settlement and discovery as opposed to preventive measures” and suggested that its role should be reviewed. “Why did this happen at all when we created the CFPB to eliminate this kind of thing? [And If it had not been detected], would this have continued to go on, would it have spread?”

Conti-Brown also finds gaps in the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act that was passed in the aftermath of the 2008 financial industry crisis. He said it emphasizes “systemic risk regulation” and “quantitative models [using] stress tests and living wills” and overlooks problems caused by individual behavior.

“This [Wells Fargo] example shows us there is something about shoe-leather banking supervision of individual institutions to get down and weasel into information where real humans — bank tellers — are making real decisions about other humans – their customers – that simply will not show up if you are modeling on the level of stress tests of living wills,” he said.

How Wells Fargo is Reaching the Digital Customer

Banks today are seeing their businesses disrupted by fintech – startups offering mobile payments, loans, virtual currencies and the like. To compete with digital startups and meet the heightened expectations of customers who want 24/7 access, engagement and security, Wells Fargo is actively bridging the gap between its cyber and physical operations. Jamie Moldafsky, the bank’s chief marketing officer, spoke about the company’s digital efforts on the Knowledge@Wharton show on Wharton Business Radio, which aired on SiriusXM channel 111.

She said the bank is changing to meet the needs of the digital customer, such as rethinking its marketing approach from straight-out selling to customer engagement. Wells Fargo also is interested in using biometrics tools like retina scanning to boost the security of customer information.

An edited transcript of the conversation appears below.

Knowledge@Wharton: What’s the most amazing thing for you in the banking sector right now?

Jamie Moldafsky:  It’s astounding when you think about historically what a very paper-based business banking used to be, and today you don’t even say checkbook to a millennial because they don’t know what that is. We still produce checks because grandma still sends a check to her grandson or her granddaughter that has to get deposited. But all of our branches and all of our systems are digitized now. It’s been a real focus of ours, not just because it’s more efficient but because it’s really more effective in dealing with customers who expect it to be immediate and easy. That’s certainly one of the biggest changes. The other is the challenges from a regulatory standpoint that require us to do what we want to do anyway, which is be on the side of the customer and do the right things. But that level of scrutiny certainly is significantly higher than it had been in the past.

Knowledge@Wharton: When many consumers think about the banking industry, that view is still probably not as good as you would like it to be. Is that a main point you have to think about?

Moldafsky: Absolutely, because trust is so core to what we do. If you’re going to entrust a company with your money and trust that it’s going to be there when you need it and that it’s going to grow as much as you need it to, that’s really important. Trust is the underpinning of that. We spend a lot of time letting our customers know that we’re on their side and helping them be smarter and more in control of their own financial futures so that they can do the things that they want to do. But you’re right, trust was really eroded. We enjoy probably the highest trust of the large banks but nowhere near the trust levels of a Google or an Amazon or some of the other institutions that really set that bar.

Knowledge@Wharton: How do you build that trust from where it is now?

Moldafsky: For us, a lot of it is about our culture. We have a very strong culture around doing the right thing, putting the customer at the center of everything we do. It’s making that more visible. A lot of the work we’re doing is to show our customers the things that we’re doing to help them and to be as transparent as we can be. I think transparency is at the core of it. Certainly, the digital revolution has enabled that, which is people feel like they can and should be able to see everything every minute of the day if they want to. Our job is to give them access to alerts or anything that helps them know where they stand. That’s something that’s going to both engender trust and make their lives better.

“We enjoy probably the highest trust of the large banks but nowhere near the trust levels of a Google or an Amazon.”

Knowledge@Wharton: But that also means banking institutions have to make a huge investment in the security around all of these systems.

Moldafsky: Because people do entrust us with their financial future, job No. 1 today is around security and cyber security. We certainly have doubled and tripled down on that. We’ve been around 160-plus years. I think we’re known for being judicious and prudent with our customers’ trust in us, so we spend a lot of money on that.

The other thing that’s really important is we’re also trying to innovate around what’s the most secure, convenient way for people to validate and verify who they are. Biometrics is becoming an increasingly big part of what we do, so the days of having to recite all those different passwords and remember what your third transaction was last Tuesday are probably going to go away.

Ultimately, many would like us to do facial recognition or voice recognition or retina scanning or fingerprint scanning. All of those are viable options. Any two of those in combination provide an incredibly high level of security but also make so much more sense for us to say, “We know you. You don’t have to give us numbers. We actually know you.” It’s better for everybody because it is more secure, faster and easier. Over 40% of our employees, or team members as we call them, are millennials. The way we do business is not only how our customers want us to do business but how our team members want us to do business.

Knowledge@Wharton: What about the mobile payment platform that is engulfing what we do? Do the banks want to get into this realm more and just not leave it to Apple or Google or any of those companies to do it?

Moldafsky: Yes, and I think Wells Fargo is a great example where, we play with everybody. We’ll support everybody because we’ll support our customers and be where our customers want us to be.

If they want Samsung Pay or Google Pay or Android Pay, we’ll be there for them. But at the same time we feel that people don’t necessarily want to have all of those different platforms and is there a way that those can come together that’s simpler and easier for our customer?

We are working on our own solutions because we do believe that having all of the ecosystem of your financial life — whether it’s deposits or loans and a mortgage – [and bring those] together with your payments actually makes things a lot better and a lot easier. Today, they’re sort of being forced by all these different players to keep all that separate. We do believe there’s a great opportunity to bring that together in a better way in the future.

“Biometrics is becoming an increasingly big part of what we do.”

Knowledge@Wharton: One of the things that we’ve talked a lot about has been the gender inequality issue. As a woman in the C-suite with a major bank, how do you view the problem and correction over the next 20 years or so?

Moldafsky: I’m proud to say Wells has, I believe, the most diverse board in the Fortune 500. We have an extremely diverse board that we’ve put together very consciously. We believe that because we serve everybody, we have to reflect that [diversity].

The composition of our leadership has to mirror that of the communities we serve. I think that’s going to be the biggest leap — when companies and organizations realize that they can’t effectively serve their constituents without reflecting that diversity, whether it’s gender or ethnic diversity.

What’s needed is much more of a conscious effort to do so. For example, we are much more focused on our senior women leaders being on outside boards because right now there’s a dearth of women on corporate boards. So, how do we make sure we’re encouraging our women executives to go on boards?

The CFO population tends to be white and male. Wells hired this wonderful Asian woman for our middle market business who brought to the company all of her relationships within the Asian community. As a result, Wells Fargo now has a significant share in that market that we would never have had if we hadn’t had somebody who actually understood and was connected to that community. I think having some champions internally that can bring that point of view in and then an organization being open to it is the other piece, which is much more of a cultural challenge that has to be overcome.

“Over 40% of our employees, or team members as we call them, are millennials.”

Knowledge@Wharton: In terms of the marketing for a major bank, how has that changed over the last decade or so because of digital technology?

Moldafsky: It is a big shift. It’s really interesting because banks historically had branches, and that was how you marketed. You had these big, big branches that people could see and they knew their money was safe. You knew the tellers. That’s still important, but what we find is now what you almost want is the big sign but the smaller branch because what you want is for people to know you’re there. But most of our transactions by far occur digitally. What’s changed is our ability to be where our customers are when they want us, as opposed to either pulling them in or trying to find them on our terms. It’s always on the customer’s term.

Knowledge@Wharton: But a lot of the traditional methods of marketing are still very effective today. They’ve just been tweaked, right?

Moldafsky: Yes, and they certainly reflect the multi-screen viewing. Even when we do advertising, we are often matching that up against the digital experience on mobile or tablet. I don’t know about you, but my kids are never just watching TV. They’ve got at least two or three different things going on at once. We have to be on those two or three different things and make it much more engaging. But interestingly, we still do spend a fair amount of money on traditional TV advertising. We’ve changed the media mix quite a bit, but that’s because people do still watch live sports and people do still watch live events. And when they do, they engage much more emotionally and for longer than they do when they’re on a mobile device where their attention span is six or seven seconds.

As much as things are very digitally oriented, things are also very local. What we see is this kind of bifurcation between what people want to experience digitally and yet people want to very much still be part of their community. For us, investments like the Wells Fargo Center in Philadelphia and other sponsorships that we do are all about being part of that local fabric, that people see us and experience us.

We’re a major sponsor now of major league soccer, which has been a great way for us to connect on things that are passion points for a lot of our customers, for millennials, for Hispanics who really are passionate about soccer now. Wells Fargo gets to be a part of that passion point.

“What’s changed is our ability to be where our customers are when they want us, as opposed to either pulling them in or trying to find them on our terms.”

Knowledge@Wharton: What are the ways you see your job and the business of reaching the consumer changing even more in the next few years?

Moldafsky: I’d say the biggest single thing that is hard for any organization now is just the speed of change and the ability and willingness to engage with your customers. It’s not about selling, it’s not about teaching. It’s simply engaging [with them]. Twitter  And it’s helping provide the information and the tools that those individuals need when they need them.

I think the hardest part as a marketer today is that it’s often real time and consumers expect you to know them. They expect you to know everything about them. We’re very conservative about that because we take privacy very seriously. We’re dealing with financial services. We want people to trust us, so there’s a fine line between how much we know about them and how much we’re willing to leverage what we know about them. We always have to respect that line. One of the biggest challenges is just around this data. We have six billion transactions a year through our bank. How much of that information do we use and how do we use it? How do we make sure we earn the trust of our customers in how we use that information?

Knowledge@Wharton: Like a lot of businesses, banks have become their own tech companies as well.

Moldafsky: We are major investors in technology and see technology as being the way in which we can engage with our customer. Our branches still are vitally important to us because when there’s something important in their life, customers actually want to talk to people.

Another interesting fact is our team members give about 1.8 million hours of their lives volunteering in their communities. That’s important because people want to see the company as people. As much as there’s this tendency to say, “Yeah, I can do whatever I want to do online or through mobile,” at the end of the day you often want to talk to somebody and know that there’s somebody there who’s going to help you through it. It’s amazing to see that multi-channel opportunity.

“It’s not about selling, it’s not about teaching. It’s simply engaging [with them].”

Knowledge@Wharton: In terms of security, what are the next steps especially with the heightened watch of the government on the banking industry right now?

Moldafsky: We treat our customers’ security as the most important thing. It has to be the single most important thing. But with that comes tremendous responsibility. How are we making sure from a data standpoint and a financial standpoint that we are stable and sound and protecting our customers’ assets? There are a lot of startups that are out there, particularly in the financial-technology space, and in some ways people will borrow money from anybody. But I think there’s a very high bar of where you put your money. I think that’s why banks still exist.

It’s why Wells Fargo still invests in those physical locations and why we are investing so heavily in security right now. We work with all the government agencies to make sure that we have the latest access to the right information to do that. We really are investing significant amounts of money into proactively focusing on our customers’ security. You could wait for regulations to be passed and you could wait for people to tell you what to do, but what’s going to make the difference is that you’re out there proactively looking for ways to make sure that you’ve got the right firewalls, and within our firewall we’ve got the right detection, and within that detection we’ve got the right response back to our customers. It’s an innovation opportunity.

Wells Fargo Posts 16 Percent Rise in Yearly Profit Read more: Wells Fargo Posts Higher Profits, Surpassing JP Morgan in 2013

Nation's largest home lender boasts higher annual profits than JP Morgan for first time since 2009

By Noah Rayman

Wells Fargo, the largest U.S. mortgage provider, closed 2013 with higher annual profits than JP Morgan, the nation’s largest bank, for the first time since 2009, according to fourth quarter earnings posted Tuesday.

The fourth largest bank in the U.S. saw earnings rise 10 percent in the fourth quarter to $5.61 billion, from $5.09 billion a year earlier. Annual profit rose 16 percent to a record $21.9 billion, surpassing JP Morgan’s $17.9 billion.

Wells Fargo provided 1 in 5 mortgages in 2013, and has benefited from record low mortgage rates that have prompted a wave of refinancing, Bloomberg News reports. With rates rising as the Federal Reserve plans to ease stimulus policies, the bank has also moved to downsize operations and reduce costs. CEO John Stumpf announced 6,225 job cuts in the second half of 2013, Bloomberg reports.

The San Francisco-based bank has also been slapped with fewer legal costs than some of its banking peers. In the first nine months of 2013, the company paid  $413 million in legal expenses, Bloomberg reports; J.P. Morgan last year paid out roughly $20 billion to settle regulatory and legal probes.

Bank of America Corp. and Citigroup Inc., the nation’s second and third largest banks, are expected to report fourth quarter earnings later this week.

[Bloomberg]

Read more: Wells Fargo Posts Higher Profits, Surpassing JP Morgan in 2013 | TIME.com http://business.time.com/2014/01/14/wells-fargo-posts-16-percent-rise-in-yearly-profit/#ixzz2qOcIiFv1

“Los pronósticos podrían seguir revisándose a la baja”

JAY H. BRYSON, ECONOMISTA GLOBAL DE WELLS FARGO:

- ¿Hubo alguna sorpresa en este reporte?
- No, creo que era mayormente lo esperado. Está actualizando lo que la mayoría de la gente que sigue estas cosas con mucho cuidado ya sabe, y es que el crecimiento en algunas partes del mundo ha resultado un poco menor a lo esperado este año.

- ¿Es posible que el FMI esté subestimando la desaceleración?
- ¿Y que podría ser aún peor? Sí, es posible que el FMI deba volver a revisar. Para China, por ejemplo, espera un 7,8% este año, y podría haber una rebaja allí. Podría ser 7%. Parece que en los últimos años los pronosticadores han estado esperando una recuperación del crecimiento en el año siguiente, y luego llegamos allí, y no sucede. Por eso podría haber más riesgos a la baja para 2014.

- ¿Qué explica el aumento de la previsión para Japón y el Reino Unido?
- Japón ha resultado ser más fuerte que lo esperado este año. Tal vez las políticas del primer ministro Shinzo Abe comienzan a tener más impacto que lo que la gente esperaba. El Reino Unido ha crecido más de lo esperado en los últimos meses.

- Ambos comparten una política monetaria expansiva.

- Sí, pero también EEUU, y ha sido rebajado. No sé si se relaciona necesariamente.

- ¿Por qué se desaceleran más de lo esperado los mercados emergentes?
- Creo que en la mayoría de ellos actualmente se trata sobre todo de factores estructurales. India es un buen ejemplo. Necesitan flexibilizar el mercado laboral y seguir invirtiendo en infraestructura. No han hecho reformas importantes en los últimos años, igual que Brasil. En China, en cambio, intentan desacelerar la economía porque si seguían creciendo al 10% anual se iban a crear burbujas que estallarían tarde o temprano.

www.df.cl

Wells Fargo CEO: Why Americans are saving so much

CEO John Stumpf discusses how his bank has seen record savings deposit growth, as more Americans look for safe places to put their cash.

By Geoff Colvin, senior editor-at-large

John Stumpf, CEO of Wells Fargo

FORTUNE -- Can you name America's largest bank? No, it's not J.P. Morgan Chase (JPM) or Bank of America (BAC). It is, surprisingly, Wells Fargo (WFC), which has the highest market cap -- recently $170 billion. (That has to make its largest shareholder, Warren Buffett, pretty happy.) Its secret? Focusing on loans to consumers and small to midsize businesses. It also provides one-third of all U.S. mortgages.

CEO John Stumpf, 59, took the helm at the economy's peak in 2007, then managed through the financial crisis. He talked recently with Geoff Colvin about the reasons Americans are saving so much, Wells Fargo's hunger for making more loans, and why it's fighting Justice Department charges. Edited excerpts:

Q: Wells Fargo is America's largest mortgage lender and has a larger share of the mortgage market than any bank has ever had. What's the future of the U.S. housing market?

A: There are about 70 million homes in America. Fifty million have a mortgage on them. The average mortgage is $200,000, so you've got about a $10 trillion market. Today about 20% of those mortgages are underwater -- they owe more than what the home is worth. But we're starting to see values come back. I don't know that we'll ever be where we were or should be where we were in the last six, seven, eight years when it was just trading up. But housing is still, for two-thirds of Americans, the American dream. It's not for everyone to own a home. But I'm bullish on housing. I'm bullish on Americans' desire to own homes. It will be slow, but it's healing almost everywhere.

With over 6,000 branches around the country, you have an unsurpassed window on the U.S. economy. What's the outlook?

We're starting a fourth year of the recovery, but it's a very cautious recovery. People and businesses are spending money on things they need, but they're not investing for the future in many cases. They're putting off decisions. In fact -- this is a surprise to most people -- in half the mortgages that will be made this year, people will either bring money to the closing -- a cash-in refi -- or use the reduced rate to shorten the term and keep the payment the same. They're paying off debt. They're deleveraging -- there's too much uncertainty right now.

How are loan applications?

We do more small-business loans than anybody else. We have more middle-market customers, so we see a ton of customers. The approval rate is back where it was pre-recession, but the application rate is a fraction. Now it's coming back, but we would love to have more borrowers. We typically run our company with about $1 of loans for every $1 of deposits. Today we're in the 80% range -- we're about $200 billion short of loans. We are hungry for loans, but there's a cautiousness because people are unsure about tax policy, about what's going on with the fiscal cliff, regulation, and a bunch of other things. It creates this sense of uncertainty, which is a really important ingredient.

Isn't deleveraging a good thing? There's an argument that the financial crisis was caused in part by people having too much debt, and they need to scale it back. Is that what's happening?

Here's the thing that a lot of policymakers fail to understand. Consumers carry a lot more debt than they used to -- in 20 years it's gone from $4 trillion or $5 trillion to $14 trillion. But the cost of carrying that debt is back to what it was in the early '90s because interest rates are so low. And people are saving now like they've never saved before.

Even at the incredibly low interest rates?

Even at incredibly low rates. In fact we think there's something between $1.5 trillion and $2 trillion on businesses' and consumers' balance sheets that is sitting in our vaults. I've never seen it like this before. I've never seen the deposit growth the way we have it, and it's not because the yields are so high. It's security.

Does Dodd-Frank eliminate the problem of "too big to fail"?

Yes. It's in the language. It's in black and white. You cannot be bailed out -- it's against the law. If we screw this up, we have to fail, and management ought to get fired, and compensation ought to be clawed back. Yes!

But the worry was that if we let the really big banks fail, it would endanger the health of the whole economy. Has that changed?

No, that has not changed, but there's a mechanism to handle that. We have $150 billion of capital. In addition to that, we have reserves set up for losses for loans. We have $12 billion of gains in our bond portfolio, plus we have about $150 billion or $160 billion of short-term and long-term debt. If you go through those steps -- first hit the common-equity holders, then the preferreds, then whatever reserves -- you'll never get to the taxpayer.

Think of Wachovia [which Wells Fargo bought in 2008]. It was having challenges in the worst economic times in our generation. All bondholders got their money. All preferreds got their money. We even gave the common some money. There's always been a mechanism for how to unwind a commercial bank that has FDIC insurance. The challenge was that when this thing hit, everybody was a bank. Fannie was a bank, Freddie was a bank, AIG (AIG) was a bank. But they weren't truly banks. And there weren't mechanisms for how to handle a Lehman or a Bear. Now there are.

Wells Fargo has said, "The core of our vision and strategy is cross-selling." Every business likes cross-selling, but why is it your strategy?

Because the way we think about the business is helping customers succeed financially and satisfying all their needs. How can you do that if you only want to pick out one piece? We think that when customers have a deep, long-term relationship with us, we get to know them, they get to know us, and we can see their entire financial situation.

It's so much easier to sell somebody the sixth product when they already have five with you and you can give them a better deal. Today we have over six products per retail household on average. A third or a fourth of our customers already have eight products or more. And we're still scratching the surface.

It seems clear that the financial services industry has a particularly large opportunity to do this. Why are most firms so bad at it?

We always say we could leave our strategic plan on an airplane, somebody could pick it up, and it wouldn't matter. It's all about execution. It's how you hire, how you inspire, your culture, how you reward, how you celebrate victories, how you deal with disappointments. This is easy to talk about, but it is all in the execution.

I remember one time a CEO of a large competitive bank, no longer there, said, "I'm going to come back from Asia. I want to stop by and buy you lunch, and tell me about this cross-sell thing." I said, "I can't eat that much, and I can't eat that long."

The Justice Department recently accused Wells of what it calls "reckless origination in the underwriting of government-backed loans." What's behind that?

I think they're just wrong on that. In fact, we have filed a motion in a court in Washington for a judgment to remove that. We take these things seriously. We have been the largest originator of FHA loans for a long time. The performance speaks for itself; 93% of our customers are current. Less than 2% of our customers who own a home as primary owner go to a foreclosure. These are much better numbers than the average for the industry. We believe we've acted in good faith. So in some cases you just say, "No, we're going to defend ourselves. We have lots of good defenses, and we're going to dig our heels in."

Over the past few years all the big banks, including Wells, have settled accusationsfrom government about various mortgage abuses. Should consumers think, "Where there's that much smoke, there's fire"? Or should they think the prosecutors are hyperactive?

There's no question our industry did not behave well in all cases, and there's plenty of blame to go around. This could not have happened without an aggressive Fannie and Freddie. This could not have happened without people who put profits before customers, and while we didn't do everything perfect in our company, if you look back at the numbers, we walked away frombillions of dollars of originations and hundreds of millions in profits because we saw things that were not in the interest of our customers.

Did we make every right move in every case? No. But the industry I think has responded. The bad players are gone. We bought them up in many cases, and now we're dealing with the issues of what they did. So far in our company we have helped over 3 million customers with refinancings, and we have helped 900,000 customers with modifications. We've forgiven over $4 billion of principal. So we are really active.

This story is from the December 3, 2012 issue of Fortune.