This is what a loss of corporate reputation looks like.

Wells Fargo, which has been battered by wave after wave of reputational crises, has seen its stock price underperform the S&P bank index by 45%, has been pummeled by regulators that have fined it $1 billion and capped its growth and has lost a significant amount of its business in various categories. On the personal level, the former CEO John Stumpf resigned because of the scandal and several board members have or are currently being removed.

Is it any wonder USAA is now singling out Wells Fargo as a target for patent infringement litigation related to one of its most popular mobile banking features: mobile deposit capture?

Wells Fargo sign
Most banks offer remote deposit capture. USAA chose to sue Wells Fargo over the technology because of the San Francisco's bank battered reputation. Bloomberg News

It didn’t have to be that way. Thousands of banks use similar technology and USAA sent letters to hundreds of them, asking for licensing fees, last year. We don’t know how many — if any — agreed, but it’s safe to assume that there are banks still using the technology without paying licensing fees that USAA could have sued. However the litigation turns out, USAA picked Wells Fargo as its initial target for a reason.

Wells Fargo has been in reputational tornado country. While its competitors have been operating comfortably from their hardened shelters, the San Francisco bank has been buffeted by the winds, getting pelted with every object the storm throws its way. In its weakened reputational position, Wells Fargo is relatively more vulnerable than its peers, its defenses more likely to be questioned and discounted because its “soft power” — the reputation institutions build through credible communications and authentic trustworthy actions over time — has been significantly eroded.

In the Office of the Comptroller of the Currency’s handbook on corporate and risk governance, under the definition of reputation risk, it warns: “Departures from effective corporate and risk governance principles and practices cast doubt on the integrity of the bank’s board and management.” In other words, the erosion of reputational value translates in tangible ways to enterprise-wide risks that spreads damage through every aspect of the organization — including the board room, the C-suite and even the rarefied world of patent law.

This caution relates to Wells Fargo in specific ways. Board members that are confident in their institution’s reputation are more likely to stand up to litigation, knowing that their stakeholders believe in them and will stand with them. Will that happen at Wells Fargo? Or will board members feel like they can’t sustain continued reputational attacks and simply settle quickly?

A bank with a strong reputation for governance and business processes could fight back in the media with a persuasive narrative about its acquisition of remote deposit capture technology. Observers would be more likely to view their narrative as credible. After all the reputational issues Wells Fargo has had, can the bank credibly mount such a campaign?

Judges are supposed to base their decisions purely on the law and juries are supposed to arrive at verdicts purely on the facts presented in court. But they are all human beings who can’t help but view events and arguments through a lens that includes their personal experiences. They have all heard and read countless negative stories about Wells Fargo’s past failings. How can that not color their judgments as they consider the credibility of the parties?

How did Wells Fargo end up in this position? How does any company? It starts off by defining reputation in traditional terms — as the peril of negative public opinion, to be managed by marketing and communications. The better approach would be to define reputation risk as the peril of tangible economic damage from angry, disappointed stakeholders whose outpourings both fuel and are fueled by negative media. That definition makes it possible to deploy risk governance and enterprise-level risk management strategies to preemptively identify and mitigate potential stakeholders, triggers, and accelerants for reputational damage across multiple departments.

Other banks should take heed. Financial institutions are under constant scrutiny. Those that can tell a credible story of good governance — and back it up — are less likely to be attacked: Their stakeholders are more likely to consider reputational incidents to be anomalies rather than evidence of systemic issues. Adversaries — some regulators, activists and even patent enforcers — will seek weaker targets elsewhere. They are in a stronger position to defend against attacks, whether through social media, the political realm or courts of law because their policies, procedures and systems have already been validated by outside parties. They are less likely to suffer sustained financial losses because stakeholders will be quicker to recognize their resilience. Reputation has real-world consequences. The good news is that practical steps can be taken to deter, and limit the damage from, the reputational tornados that are now sweeping the corporate and financial landscape.

Dr. Nir Kossovsky

Dr. Nir Kossovsky

Dr. Nir Kossovsky, CEO of Steel City Re, is an authority on business process risk and reputational value.

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