Dick Kovacevich had a clear philosophy at Norwest and Wells Fargo: Money moves.
This means that customers move their money from borrowing instruments to investments, for example. It also means that a bank should capture as much of that money as possibly by offering products and services to meet every possible need. Consequently, Wells Fargo actively markets 86 product lines to its many customer bases, and it has one of the most enviable cross-selling ratios in the business.
In contrast to this strategy, many supercommunity banks are exiting key businesses, such as mortgage origination and servicing, credit cards, SBA lending, indirect auto lending, and merchant cards.
There are legitimate reasons for this exodus. Bankers believe that some businesses (e.g. credit cards) are too scale-sensitive, and that smaller banks therefore have a difficult time making money at them. Bankers also believe that some businesses are too volatile in terms of earnings and capital hits (mortgage servicing) or are too unprofitable because of intense competition (auto loans).
The reasoning behind the decision to exit a business line is probably sound in most cases, if not all of them. Yet an unintended consequence is that supercommunity and community banks are continuing to shrink their business base. They are increasing their dependency on net interest margins, which have been on a downward slope for the past 20 years, and they are cutting off fee-producing businesses that could help them diversify their income stream.
"Sticking to your knitting" and "doing what you know best" are both noble goals. However, in our business, leveraging customer relationships is the greatest opportunity we all have. It reduces "next product" acquisition costs and increases customer retention. Cross-selling customers increases their profitability and improves the tenure of that income, which creates a higher net present value for the company and improves earnings predictability and stability.
Further, narrowing one's product line inherently increases enterprise risk, since diversification, the most basic risk reduction tool, is not happening.
I understand that a bank's strategic position should dictate its product line, and that Wells is a very large company. Nonetheless, I fear that, in our quest to offer only profitable products and services, we end up narrowing our lineup again and again, instead of figuring out how to make money by selling more things.
For example, wealth management has been the bane and the salvation of many community banks. Some find it exceedingly unprofitable, and others have made it a major contributor to the bottom line. The difference, in my opinion, is management. There are other factors to be considered, such as the tenure of the business and investment performance, but ultimately strong management can make lemonade out of lemons.
The point is simple — don't abdicate the business to our larger brethren and monoline competitors. Use your current platform and core competencies to expand into related offerings, and figure out how to offer them profitably.
The long-term effects of this strategic investment will be beneficial to your income and your franchise value.
