The Three Illusions that Caused the Wells Fargo Debacle

Wells Fargo as a bank was established in 1852 with a well-deserved reputation of delivering for clients reliably and expeditiously even if it involved protecting gold from bandits. Its heritage stagecoach symbol was powerful. 

During the late 1900s, it developed a goal to make the customer’s interaction with the bank less stressful, annoying, and unpleasant. One strategy was advances in ATMs, online banking, index funds and other “high-tech” programs. The second was to elevate the banking experience with 24-hour banking, phone tellers, more site locations, and with a signature program—a $5 commitment that the wait for a teller would be less than 5 minutes. The culture encouraged entrepreneurial action and creative thinking to solve customer problems.

In 2023, it was still feeling the results of the scandal that started over two decades prior when pressures from the cross-selling strategy accounts for customers were opened without their knowledge or permission. The result was a loss of trust, nearly $4 billion in fines and restitution that is still building, and an unprecedented asset cap imposed by regulators in 2018 that inhibits growth.

What happened? One explanation was a series of events that can be represented or described with three illusions. 

1. The first illusion is that an organization with the heritage and performance of Wells Fargo would never engage in fraudulent behavior on a large scale even with an ownership change. Wells was purchased by smaller Midwest bank Norwest in 1998, a transaction made when Wells Fargo was weakened and distracted by an acquisition of First Interstate Bank, which created a merged computer and operations system that was incapable of performing customer-facing tasks.

As a result of the Norwest takeover, a strong CEO, Dick Kovacevich, and other key Norwest executives took control of Wells. With the new CEO and his team came an obsessive commitment to a new business strategy, cross selling, which involved selling or enticing customers to add additional banking services, their goal was to increase the average number of services from 3 to 8. An acquisition can and often does fundamentally change a firm and not always for the better either for shareholders, for customers, or for society.  But that was not at all clear and the outset or even a decade later.

2. The second illusion was that the strategy of cross selling was logical and would pay-off handsomely terms of customer connection and loyalty as well as profit per customer. It had face validity and was perceived to fit into the Wells tradition of delivering to the customer efficient, stress-free interactions.  The logic was based on three erroneous assumptions.

• First, there was an enormous growth opportunity if the bank expanded its vision to being in the financial services business offering insurance, investments, and venture capital (the last two made possible by the repeal of the Glass Steagall Act) as well as a complete array of banking services. Wells with its geographic coverage and technology was well-positioned to offer customers the benefits and efficiencies of one-stop financial services. The problem was that most customers did not long for or even desire such a benefit. The reality is that customers in general actually wanted investment and insurance advice from those that had in-depth knowledge. 
• Second, the fact that customers with more accounts were more profitable was true but the key question is, rather, what profit increment to you receive if you spend to grow a customer from three to four accounts? A very different question yielding a very different result.  

3. The third and critical assumption was that the organization could manage the cross-selling strategy without destroying employee morale, creating a corrosive ethical culture, and, worse of all, incentivizing and even compelling employees in large numbers to fraudulently open accounts. The cross-selling strategy evolved into a pressure-leaden, numbers-driven nightmare for the employees and annoyance and sometimes serous financial loss for customers. The account acquisition goals were monitored by the day even the hour, compensation was tied to the metric, and shortfalls resulted in draconian punishments including being fired. This was not the “old” Wells organization in action. 

The main characters were all Norwest executives. Among them were John Stumpf, another Norwest veteran who became CEO in 2007 and Carrie Tolstedt who joined Norwest in 1986, became head of the community (retail) bank in 2005 and with the support of Stumpf was the driver of cross-selling. Both left the bank in late 2016 under a cloud but along the way got accolades. Stumpf was named Banker of the Year in 2013 and Tolstedt was named the most powerful women in banking in 2015. 

The cross-selling effort went on for a dozen years without outside notice.  The practice at the outset may have been within bounds but, over time, it became more intense and the fraudulent behavior more pronounced.  From 2011 to 2016 over 5,000 employees had been let go because of such behavior. An article in the WSJ in 2011 begin to ask questions and two years later a piece in the LA Times had more details. In 2015 the City of LA filed a lawsuit against Wells.  

Why did it take so long to take action? Four possible reasons: 

1. The two CEOs and their executive team were not connected to the Wells Fargo heritage or culture but had the power to create and execute strategy because they represented the new owner ship and because they had committed forcefully to a clear, measurable strategy that was not obviously flawed. 
2. The financial performance was good as a firm and the cross-selling effort was making the numbers. Such success trumps questionable management style and some visible excesses.  
3. The fact that decentralization is dominate means that the head of the Community Bank was evaluated on performance and strategy. Oversight of tactical programs was perceived to be out of bounds from the board and for the risk management groups in the firm who were focused on the loan portfolio. 
4. The board was late and slow to detect and respond to the problem. It got its information particular the results of the “investigations” into the problem from a CEO and staff who had cross-selling as a core strategy and some key people falsely argued that the problem was minor and controlled using data that was both incomplete and false.  The board finally got control but long after the practice has started and demonstrated serious issues.

There are many lessons but they all involve the necessity to be skeptical about new leaders, new strategies, measurement-driven programs (behavior follows measurement), and the mask of success (the fabled football coach John Madden once said that winning is a great deodorant).