Wells Fargo’s CEO Wants It All: Your Business, That Is
Dick Kovacevich says that “the banking industry is dead and should be buried.”
He’s not the first to predict the demise of traditional banks, but it’s a surprising admission for someone such as Kovacevich, who runs one of the nation’s largest banks, Wells Fargo & Co.
Time to cash in those stock options and go home? Not quite, says the charismatic Wells Fargo chief executive.
In what some analysts say could be the last chance for big banks to hang on to their customers in an increasingly competitive marketplace, industry heavyweights such as Wells Fargo are racing to reinvent themselves as so-called financial supermarkets.
It’s the Holy Grail of banking. Rather than be satisfied with just checking accounts and loans, banks want to grab much more of their existing customers’ financial business, from credit cards to mutual funds, and auto insurance to retirement planning. They want to become a one-stop financial shop for all their customers’ needs.
Kovacevich didn’t invent the strategy, but he’s betting his bank that it will work. After closing the 1998 merger between Wells Fargo and Norwest Corp., Kovacevich has tried to infuse the stuffy San Francisco bank with a retail spirit. He refers to branches as “stores.” Tellers are viewed as salespeople. When Kovacevich describes his vision, he’s more likely to use an example from Wal-Mart Stores Inc. or Home Depot Inc. than from one of his banking rivals.
Kovacevich has something to show for his efforts: Most banks sell about two accounts or financial products per household. Wells Fargo boasts 3.7 per household; Kovacevich’s goal is eight.
Sounds simple, but it isn’t. The cross-selling strategy has been tried before, and it’s never worked.
In the 1980s, American Express Co. and Sears, Roebuck & Co. each took a stab at trying to become a financial supermarket. Then each abandoned the idea.
With the rise of the Internet, some say the one-stop shopping dream is even less likely to work today, because consumers have more choices at their fingertips than ever before.
Also unclear is whether consumers really want to centralize all their financial business at a single institution, or even if they do, whether banks would be their first choice.
Kovacevich isn’t worried. Customers will want financial supermarkets, he says, they just don’t realize it yet.
In a recent interview with Los Angeles Times Business Editor Bill Sing and banking reporter Edmund Sanders, Kovacevich discussed why he believes financial supermarkets will work, what it will mean for customers and what financial institutions will need to do to survive.
Q: What’s your current business strategy, boiled down to a single sentence?
A: Our objective is to get 100% of a customer’s business. Everything. When we do that, we’re going to make a lot of money because the more business you have with a customer, the longer they stay with you.
If we have a small-business customer, we want their [personal] accounts. If we have a retail customer, we want their company’s business. We want your personal business. Your investments. Your loans.
Q: Sounds great on paper. But if I’m a customer, why should I give you all my business?
A: We’ll make you a better deal.
Q: But banks have seldom offered better deals. They’re usually more expensive.
A: We can give you a better deal because we’re saving money. If you take the 15 financial products that you now buy from other financial institutions, add up all the prices, and then bring them all to Wells, we’d probably save you at least one-third.
Q: How so?
A: Let me tell you why it’s going to work. I would argue that a certificate of deposit, an annuity and a mutual fund are all similar products. They are long-term savings vehicles. But because of [government-imposed] regulatory boxes, the consumer has had to pay for three different distribution systems: bankers, insurance agents and stock brokers. Also, consumers have to decide [by themselves] which product meets their needs, because they can’t believe the salesman who only wants to sell his product.
Is there a business proposition in bringing all three products to the consumer at about one-third the cost, and, more importantly, help the consumer decide which of these products makes sense? Absolutely. It’s going to get figured out. All we don’t know is when.
If you can deliver all this through the existing branch system, and have only one expensive CEO, only one brand to advertise, one computer network, you can save a lot of money. With that money, you can either put it in your own pocket, or you do some sharing [with customers]. My guess is you are going to see some sharing of that.
Q: But do U.S. consumers really want this? People don’t like having everything in one place.
A: I disagree. People would have said the same thing about the home-improvement industry. There was the wallpaper store, the paint shop, the lumber store, the plumbing store. And look at what Home Depot did. The customer wants it. There’s no question. They just don’t know they want it yet. They didn’t know they wanted Wal-Mart or Home Depot until someone gave it to them.
Q: Haven’t other companies like Sears and American Express tried this in the past and failed? What are you doing differently?
A: All they did was bring companies together and run them as if they were investments. There wasn’t cross-selling. There wasn’t a better deal to be done. You still got different statements [from the various companies]. They still called all the units by their different names. It was more like leasing space in a department store. It wasn’t really integrated. And to my knowledge, I don’t think they gave better deals to customers. And they certainly didn’t get cooperation among their own people. Employees were worried about losing their own commissions. No one’s going to do it for the Gipper. You have to have your incentive systems in line.
The banking industry is dead and should be buried. At best, it’s holding its own, but it’s probably going down. The reason you saw pure banks reduce branches and costs [in the 1990s] is because revenue was going away. But the proper reaction was not to cut costs or close branches. The answer is to get into other businesses, using the existing distribution system.
Q: Won’t it be hard for a bank to provide the level of service that a specialist can provide? Are you going to be able to provide discount brokerage services better than a Schwab? Or cheaper auto insurance than 21st Century?
A: That’s not the problem. You don’t have to be better. You only have to be as good. If we can be as good and save the customer money and be more convenient, we win.
Q: Doesn’t the Internet make this idea of one-stop shopping for financial products moot? Just as you are trying to bundle products and services, the Internet is providing people with more choice and access to competitors than ever before.
A: Let me ask you: What’s the advantage of shopping on the Internet?
Q: Choice? Price? Convenience?
A: Convenience. Even to find the best price, it’s the most convenient way to do it. The Internet is a valuable channel, but people still have to sort out what it all means. There’s too much538976288information. When you ask people why they buy financial products, “price” is about fourth or fifth on the list. Convenience is the most important.
How many people even know what the cost is of their mutual fund? It’s not about price. It’s about returns. Advice. Trust. With mortgages, it’s often speed, rather than interest rates. As long as you’re in the ballpark, price doesn’t dictate most people’s [choice of] financial services.
Who wants 15 statements coming to their door? Why do you want to search 55 Internet sites for the best deal? Get a life!
Here’s a test: Look at best CD rates published in the newspaper. Why is it that more people have our 3% CD than the 8% CD they see advertised in the newspaper? People think: “This is my money. I don’t know who these guys are [with the 8% CD]. I don’t trust them.” It’s not only about price. Never has been.
Q: Let’s assume you’re right. Isn’t cross-selling every bank’s strategy right now? Even insurers, securities firms and mortgage companies are trying to become financial supermarkets. Won’t you all be chasing the same business?
A: Cross-sell is like the Loch Ness monster. It’s often talked about, but never been seen. Most companies are not really doing it.
But then, if somebody could copy this idea in a millisecond, it would have happened already. And why would I want to pursue something that has no value because it can be easily copied? The fact that this is so hard to do is the reason for the competitive advantage. Everyone understands the Home Depot strategy and the Wal-Mart strategy. Why do they still have their market share, if everyone could do the same thing? It’s because this is not easy to do.
Q: Let’s shift gears. What’s in store in terms of bank mergers? Does the Chase Manhattan-J.P. Morgan deal challenge banks like yours to pursue big acquisitions?
A: We’re not against big mergers, but big mergers are harder to do. There are fewer players. And they are more risky. Therefore, unlike a lot of people, I think you need to pay lower prices.
Q: Experts have been predicting for decades that bank branches will diminish, yet they continue to increase in number. Now even some Internet banks are opening physical locations. What’s the future of the branch bank?
A: Either branches will diminish over time or more business [transactions] will go through existing branches. In other words, it may be someone else’s branches that close. The insurance agent’s or mortgage lender’s.
In California, before the merger, Norwest was the fourth-largest mortgage originator and had about 175 offices in California. Those offices went away and we put the mortgage officers in the branches.
But we don’t believe in chasing customers out of the branches. Tellers are our No. 1 source of referrals.
Q: How are you going to get younger people, who tend to use ATMs or online banking, back into branches?
A: If they don’t want to go to a branch, have it their way. Wells Fargo has been in the [online] business five years and hasn’t sold a thing. Why not? This is a wonderful opportunity. This could be our best sales channel. But we still think in these narrow silos.
Q: Who’s in charge over there? Why don’t you do something about that?
A: (smiling) I know! Who’s the CEO of that company? If they had a good CEO, they’d figure it out, for cryin’ out loud.
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Wells Fargo’s CEO
Name: Dick Kovacevich
Occupation: Chief executive, Wells Fargo & Co.
Age: 56
Background: Raised in Enumclaw, Wash. (pop. 3,000); drafted out of high school for New York Yankees, but instead headed to Stanford, where he received master’s degree in industrial engineering and business administration.
Resume: Led international operations for General Mills’ craft game and toy division; joined Citibank in 1975 and eventually led consumer business; became chief operating officer of Norwest Corp. in 1986; named CEO in 1989; named Wells Fargo CEO after the 1998 Norwest-Wells Fargo merger.
Residence: San Francisco
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Company at a Glance
Headquarters: San Francisco
Employees: California, 27,000; nationwide (including California), 104,000
Assets: $234 billion*
Core deposits: $134 billion*
Rank by assets: California, No. 2; nationwide, No. 7
Ticker symbol: WFC
Year-to-date return: 9.3%
Source: Wells Fargo & Co.; Bloomberg News
