CULTURE IN BANKING IS EVERYTHING

LESSONS FROM THE WELLS FARGO CRISIS

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CULTURE IN BANKING IS EVERYTHING• Wells Fargo, known and loved by investors for its cross-

selling strategy.• On 8 September 2016 Wells Fargo is fined $185 million to

settle a long-running investigation that charged the bank with falsifying millions of customer accounts to boost sales.• CEO, John Stumpf sells $61 million worth of Wells Fargo

shares in the month prior to the fraud revelations.• Stumpf is called to testify before Congress.• Wells Fargo share price collapses, losing $25 billion in value

within the following week.

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John Stumpf managed to unite the usually discordant Banking Senate Committee in a chorus of outrage.

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CULTURE IN BANKING IS EVERYTHINGWells Fargo is now associated in the minds of consumers with appalling customer mistreatment.Public trust in this once revered bank has been shattered.

WELLS FARGO CULTURE• High tempo sales–driven culture dominates after 1998 merger

with Norwest.• Wells Fargo adopts a central sales target: “eight is great”.• This cross-selling strategy becomes the cornerstone on which

the bank’s culture is built. • The hard selling culture is evidenced in every annual report

going back to the 1980s.• Strategy and culture are closely linked, often because the

same person puts them in place.

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622/04/2016

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CONSERVATIVE LENDING, AGGRESSIVE SELLING

22/04/2016

• Branch staff experienced freedom from central control regarding credit decisions, only.

• Loan-to deposit-ratio in 2015 is 0.7% • US mainstreet-type banks average 0.9%• Tangible equity-to-assets ratio is high by

international standards at 7.8%.• Wells would be a highly profitable bank

even without the hard selling culture.

STUMPF ON CULTURE“If there is one job I must do for our team members, customers, communities and shareholders, it is to be the keeper of our company’s culture. It is the role of all team members to understand our culture, internalise it, live it, teach it and reinforce it”.

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WHAT WENT WRONG?• However, internally, the bank was aware that the high-pressure

sales culture was leading to serious wrongdoing. • Since 2011, by its own admission, it had been firing employees

who sought to boost their sales targets by secretly opening fake customer accounts.

• Yet the bank continued to promote these cross-selling metrics to investors without informing them of the fake account generation.

• Top executives, meanwhile maintained that the problem originated with low-level employees.

• It is worth revisiting Stumpf’s vision of culture and where it stops and starts.

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WHAT WENT WRONG?• What went wrong at Wells to derail a

business model that was so successful for so long? • Our contention is that nothing went

wrong.• But that an overly aggressive central

target will eventually push a bank into trouble.

It is only a matter of time.22/04/2016 10

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WHAT IS CULTUREA corporate culture may be viewed as comprising two dimensions:

1. An ethical stance – the extent to which an organisation will go to exceeding its minimum obligation to stakeholders: • serving short-term and long-term shareholder interests• multiple stakeholder interest• contribution to society

2. A cultural operational model - how to steer the bank operations to achieve its ethical stance.

• Was the Wells Faro culture designed in such a way as to betray the bank’s customers?

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PROBLEMS OF CULTURE• Post-8 September announcement Wells Fargo

announced a moratorium on cross-selling and is addressing its risk controls.• However, this is more than a process problem -

simply eliminating sales quotas will not repair the bank’s corporate culture.• To succeed, these efforts must lead with

accountability in the executive suite.• Those efforts may also get a boost from

external forces, as calls grow louder for prosecutors to focus more on executives.

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PROBLEMS OF CULTURE

1. Banking is not retailing2. Product development3. Remuneration structures4. Excessive focus on growth and

market share5. The CEO

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RECOMMENDATIONS1. Commit the bank to always act in the customer’s best interests

– and mean it.2. Commit the bank to a demanding code of ethics – and publish

it.3. Make sure the overall culture of the bank is right.4. Get to know your customer’s real needs - make cross-buying

the objective.5. Change the management team if cross-selling is a core culture.

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CONCLUSIONS• Let frontline staff have an input into the target-setting

– or abolish central targets altogether.• An overly aggressive central target will eventually

push a bank into trouble.• The best hope for better retail banking lies in banking

becoming a recognised profession like accountancy and law where bankers are obliged to act in their customer’s best interest.

WHO IS RBA?RBA is the only educational and professional body in the world dedicated exclusively to offering post-graduate professional education in the retail banking field.

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THE RBA MISSION

RBA’s mission is to promote retail banking as a recognised profession.And to promote the status of retail bankers as internationally recognised professionals.

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THE RBA VISION

RBA’s vision is for a world where retail bankers in every bank, in every country of the world:

are trusted professionals dedicated to doing what is best for the client.

abide by a strict code of ethics and professional conduct.

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THE RETAIL BANKERS OATH