What happened at Wells Fargo?

In the 1990’s, I was working at Carmichael Lynch Advertising and one of my clients was Norwest Corporation. This was prior to Norwest’s merger with Wells Fargo in 1998.

At the time, the historically conservative American banking industry was undergoing a period of deregulation. This meant that banks could expand their customer offerings to include investments and insurance products, and to compete against different types of financial service providers on price. With these changes came the need for bankers to shift to a more competitive growth mindset.

This was also a time of consolidation in the banking industry and the highly respected Norwest Corporation was a buyer. Through acquisition, Norwest had grown to be a significant presence in the U.S. banking industry and one of the keys to Norwest’s success was the emphasis placed on banking as a retail activity. This effort was led by Richard Kovacevich who came to Norwest as head of retail banking and later became Chairman/CEO. Earlier in his career, Kovacevich had been a division general manager with Minneapolis-based General Mills, whose legendary brands include Gold Medal Flour, Betty Crocker and Cheerios. From this experience Kovacevich brought marketing concepts like brand loyalty, market share and purchase frequency to retail banking.

Kovacevich set out to change the idea of retail banking from being very transactional to building relationships with customers. This involved expanding the range of services provided by Norwest and a needs-based marketing approach that matched services with different customer profiles. There were also changes in nomenclature at Norwest. The banking locations were no longer called branches, they were now ‘stores’ where services were bundled as ‘products’ and ‘sold’ to customers. Kovacevich also introduced new marketing metrics like market share and the now infamous concept of cross-selling.

To understand these decisions and why they were so successful for Norwest, it’s important to think about the times and the context. At the time, most banking was done in person, with face-to-face transactions done in a location that was close to where customers lived or worked. Also, Norwest did business in mostly small to mid-sized markets in the midwest US (Minneapolis being the largest) and their local banks and bankers had strong connections in their communities.

“Our formula for success is simple: Cross-Sell + Customer Satisfaction = More Profit + More Customer Loyalty.” 

Richard Kovacevich – 1997 Norwest Annual Report

Kovacevich’s strategy for Norwest was based upon creating long-term, profitable customers. He laid this out in the 1997 Annual Report where he said that the more products a banking household has with us, the more loyal they are to Norwest.  For simplicity, Kovaceivch reduced the strategy to a shorthand expression of his main idea. He said, “Our formula for success is simple: Cross-Sell + Customer Satisfaction = More Profit + More Customer Loyalty.”  At the time, the average number of products per household was around 3.2.

Now fast forward to 2016 and the discovery that improper sales practices in cross-selling at Wells Fargo had led to the opening of over 3.5 million unauthorized customer accounts. This was the first of a series of revelations that uncovered unethical business practices in many areas of Wells Fargo and forced changes in senior leadership, replacement of board members, and resulted in fines totaling in the $100s of millions of dollars. So, what happened at Wells Fargo?!

When the scandal started to unfold, I was stunned to learn that the simple idea that Kovacevich had used to unite the newly deregulated, acquisition-patch-worked organization of Norwest in the late 1980s, and 1990s was still the centerpiece strategy for the now mammoth Wells Fargo of the mid-2010s. This was despite seismic changes in both the financial services industry and within the Wells Fargo organization. How could it be, I wondered, that the organization was still clinging to cross-selling like it was the holy grail?

Of course, there are never simple answers when facing organization failures of this magnitude, but I think the question of “why was cross-selling still the focus” may be at the center of what went wrong at Wells Fargo, and there are many insights that can be derived by probing this question from an organization development, systems perspective.

Wells Fargo’s retail banking strategy had over time transitioned to new leadership and this new leadership committed a very crucial, but all to common error— taking a strategy built around values and culture, confusing it with measures, and then reducing it to quantifiable actions. They took a simple idea that was intended for a specific time and purpose — to create a new mindset and influence behavior — and turned it into concrete measures with targets of 8 products per customer and aggressive daily goals for referrals and sales per banker. As a result, the concept of cross-selling became detached from its original meaning and purpose. They had, in essence, weaponized it.

The root cause of sales practice failures was the distortion of the Community Bank’s sales culture and performance management system, which, when combined with aggressive sales management, created pressure on employees to sell unwanted or unneeded products to customers and, in some cases, to open unauthorized accounts.”

2017 Investigation Report to Independent Directors of the Board of Wells Fargo & Company

The second ill-fated error was creating the myth that cross-selling was about value creation. Cross-selling was put forth to employees and shareholders as the ‘secret sauce’ that drove the value of the Wells Fargo organization. Former CEO, John Stumpf, often cited Wells Fargo’s success at cross-selling as one of the main reasons to buy more stock in the company. But cross-selling had become transactional, and value creation is about relationships and trust. And, given the immense size and diversity of Wells Fargo’s business lines and the complexity of how banks make their profits, it was an irresponsible claim for Stumpf to make. His absurd explanation for why the goal was set at eight products per customer was “because eight rhymes with great.”

Using a simple pie metaphor, if value creation is about increasing the size of the pie and value capture is what enables companies to get a bigger slice of that pie, value extraction is the opposite. It involves obtaining a larger slice of the pie by manipulating the process for dividing up the pie. Setting cross-selling goals that were unreachable without resorting to unethical behavior had become a strategy for value extraction, not value creation. It was unsustainable and doomed to fail.

This is why strategy should never be confused with measures and why neither of them should be confused with culture. Wells Fargo leadership had shirked their responsibilities for building a purposeful, sustainable organization and let numbers and myths rule over their culture. They were morally and ethically disconnected from how their decisions impacted the lives of others, including employees and customers, and failed to see how disconnected the strategy had become from their espoused values. In short, despite substantial changes in the external environment, Stumpf, and those around him, lacked the imagination to see Wells Fargo any differently from how Kovacevich had imagined Norwest decades earlier. They just kept beating the drum left behind by the rainmaker, and ended up looking like fools.