Funding commercial mortgages with customer deposits is a central purpose for any huge bank. But when a big bank plays fast and loose with its reputation to the degree Wells Fargo has, it creates a special risk to the entire commercial lending ecosystem that should be understood.
Wells Fargo’s recent scandal is the living definition of “fast and loose”. The bank was outed as an identity thief and slapped with a $185 million fine for the fraud of signing up millions of its customers for programs without their knowledge or consent. But that’s a mere traffic ticket compared to what may be coming from market recrimination.
A recent study by consulting firm CG42 spoke to 1,000 of Wells Fargo’s customers and found, unsurprisingly, that people don’t like doing business with a bank they can’t trust. The study identified a potential loss of deposits totaling $99 billion as customers head for the door. From the CG42 study:
Our findings show significant damage has already been inflicted on the bank’s reputation. Over 85% of consumers surveyed are aware of the scandal, and positive perceptions of the brand sunk from 60% before the scandal to 24% post-scandal. More tellingly, negative perceptions of the brand increased from 15% before the scandal to 52% post-scandal. This blow to Wells Fargo’s reputation will hamstring the bank’s ability to retain customers and attract new ones, as our study reveals.
While only 3% of Wells Fargo’s customers report being affected by the scandal, a full 30% claim they are actively exploring alternatives and 14% have already made the decision to switch banks as a result of the scandal. This represents $212B of deposits and $8B of revenues at risk. Our projections indicate Wells Fargo will lose $99B in deposits and $4B in revenues over the next 12-18 months as a direct result of the scandal, dealing a hard blow to the bank’s finances.
Consistent with findings from our past Retail Banking Vulnerability Studies, community and regional banks stand to gain the most from the fallout of the scandal, with a projected $38.7B in gained deposits and $1.6B in gained revenues over the next 12-18 months. Chase and Bank of America will also profit from the fallout, largely due to their national presence which makes them a viable alternative for customers who seek the convenience of a bank with branches across the U.S.
The chain of cause and effect goes like this: $99 billion of deposits walk out the door, depriving Wells of its least expensive capital, leading to higher capital costs for its borrowers financing new commercial mortgages. Add to this the (unknown at press time) potential for angry commercial borrowers currently financed through the bank to re-finance and take their business elsewhere.
Is there a mass exodus of commercial customers through refinance in the cards for Wells Fargo? Some believe not, with one Wall Street analyst referring to Wells’ customer base as “incredibly sticky”, meaning the overhead cost of changing lenders is too steep for customers.
But that perspective may fade as the scandal continues to expand from the retail side and into the commercial side of the bank’s business. Coming to light now are tales of Wells’ shabby treatment of its business customers. In other words, Wells appears to have been just as abusive in the cultural and economic space where commercial financing lives. From Reuters:
Reuters also spoke to a former Wells employee, and a lawyer representing former employees and a former and current Wells customer, who described abusive sales practices with multiple business accounts. Jose Maldonado, a restaurant owner in Southern California who banked with Wells Fargo for 15 years, said he discovered seven accounts after enlisting the help of his accountant. He initially closed extraneous ones, and ultimately moved his remaining business to Bank of America Corp and JPMorgan Chase & Co.
“I don’t like Wells Fargo anymore. I don’t feel comfortable,” Maldonado said in an interview. “In the past, there were sometimes crazy accounts without my permission.”
Langan declined to comment on Maldonado’s accounts.
An ex-Wells Fargo business banker, who declined to be identified, said employees at his former branch were required to sell products to small business customers such as hair-salon owners and carpet cleaners in packages of three – regardless of whether they needed them.
Those typically included accounts for checking, credit card processing and payroll, and were often linked to additional savings accounts, said the former Wells banker. Bankers also tacked on business credit cards and were pressured to call a Wells insurance unit, with the customer present, to push business liability policies.
News of Wells Fargo’s business practices isn’t done doing damage. The question is: will the commercial mortgage finance marketplace hold Wells alone responsible, or will all too-big-to-fail banks be looked at skeptically in the future?
With the expected flight to community banking, and with so many alternative financing options arriving every quarter, it wouldn’t be a surprise.
(Photo credit: Wikipedia)