Investopedia/Greg McFarlane: How Wells Fargo Became One Of the Biggest Banks In America

How Wells Fargo Became One Of the Biggest Banks In America  
By Greg McFarlane | Updated December 8, 2017 — 1:16 PM EST
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Wells Fargo is currently embroiled in a scandal where it is alleged that employees opened millions of fake accounts under the names of unwitting customers. The scandal has rocked the banking industry, and has dealt a critical blow to the bank's reputation. How does Wells Fargo (WFC) usually make money? Well, they lend it out at a higher rate than they borrow it at. They’re a bank. There isn’t supposed to be much more to it.

Banking is the ultimate intangible industry, moving assets from lower-valued to higher-valued uses in the most impalpable of ways, but that still leaves plenty that distinguishes Wells Fargo from its major U.S. competitors. Starting with its size and its reach. Wells Fargo’s $293 billion market capitalization makes it the second largest bank in the United States, and second in the world behind the Industrial and Commercial Bank of China. With branches in all but 11 states, Wells Fargo is one of America’s few truly national banking chains.
Big, Regional Acquisitions

The bank as it’s currently comprised was created by a merger of large superregional banks. Founders Wells and Fargo created their namesake in 1852 to cater to the growing population of gold miners and related hangers-on in California, which back then was in the early stages of its transition from distant backwater to most populous and economically powerful state in the union. After close to a century and a half of steady growth, in 1998 Wells Fargo merged with Norwest Corp., headquartered in Minneapolis. A decade later, Wells Fargo bought out East Coast giant Wachovia. Add them all together, and Wells Fargo can now claim 70 million customers from coast to coast.

Officially, Wells Fargo divides its operations into three categories. In ascending order of importance those are wealth, brokerage and retirement; wholesale; and community.
Serving the Rich and the Mass Market

Wealth, brokerage and retirement means financial services for rich people. This end of Wells Fargo’s business doesn’t just dispense advice, e.g. on how to minimize taxes, but also helps set up foundations, solve inheritance issues before any might arise, etc. Every crazy rich person knows, at least in the United States, preserving one’s affluence can be almost as much work as it was to get wealthy in the first place. All told, Wells Fargo made $2.4 billion of net income off wealth management, brokerage and retirement in 2016. If that sounds substantial, it’s easily the least remunerative of the bank’s three areas of operations. And just another example of a phenomenon we see again and again: while it’s good business to sell to rich people, it’s even better business to sell to everyone else. Richard Marcus, heir to the Neiman-Marcus fortune, lives very comfortably. Alice Walton, daughter of Wal-Mart Stores, Inc. (WMT) founder Sam Walton, could buy and sell Mr. Marcus several times over.

As for “wholesale,” that word has a slightly different meaning in banking than it does elsewhere. Plenty of banks don’t even use the term, but at Wells Fargo it’s a catch-all for underwriting, and selling asset-backed securities, along with other types of banking for large corporations and even other banks.
Not Just Retail Banking

Actually, that doesn’t even begin to cover it. Wholesale banking includes, for instance, equipment financing. If you want to buy a dragline for your surface mining project, and don’t have the $35 million or so on hand to pay for it with cash, Wells Fargo can front you the money. Wells Fargo also handles crop insurance, commercial real estate, energy syndicated loans and more. Many of the Fortune 500 companies do at least some wholesale banking with Wells Fargo. That’s when they’re not transferring their risk. We’ll bet you didn’t know that Wells Fargo is the seventh-largest insurance brokerage in the world, too.

When a multinational with tens of millions of dollars in cash on its balance sheet needs somewhere to store that cash, Wells Fargo wholesale is where they do business. To be a Wells Fargo wholesale customer, you need annual revenues of at least $5 million. Wells Fargo’s wholesale operations have even greater reach than its community operations do. The bank has wholesale offices in 42 states, manned by 32,000 employees. That’s to say nothing of its wholesale offices across the globe, from Santiago to Seoul, Calgary to Cairo, and Sydney to St. Helier. All told, profits from wholesale banking totaled $8.2 billion last year, far more than wealth, brokerage and retirement operations.
Community Banking, Above All

Which leaves community banking, and hopefully it’s not too much of a spoiler to inform you that that’s where Wells Fargo is most successful. Community banking earned Wells Fargo $12.4 billion in 2016, on revenue of more than $48 billion. That margin might seem high, but it really isn’t. If you’ve ever been skeptical of how you can possibly be so big a profit center to a bank, what with your modest checking account balance and your restrained use of your debit card, understand that community banking is more than just ordinary people depositing their paychecks and maybe buying the occasional mortgage. To cite just one example, credit cards contribute hugely to Wells Fargo’s bottom line, as the people busy running up 5-digit balances ought to know. Wells Fargo boasts that its customers average more than six “products” per household, and wants to get that number up to eight. As far as Wells Fargo’s concerned, Shakespeare’s Polonius was right: neither a borrower nor a lender be (we're very well-read here at Investopedia). Instead, the bank would rather you took on both roles.
Scandal

In December of 2013 it was revealed by the LA Times that some fake accounts and credit cards had been opened by bank employees desperate to meet their sales quotas. At the time of the story Wells Fargo denied the claims. It was only three years later in 2016 that the company would admit that over 3.5 million unwanted accounts were opened.

Here's what happened:  In order to get bonuses, Wells Fargo employees needed to hit huge sales goals that many felt were unrealistic. Instead of finding real customers, employees just created accounts in existing names of Wells Fargo customers, even using fake email accounts and PIN numbers to sign them up, seemingly hoping no one would notice. Small amounts of money were even transferred to these accounts to make them look real. Needless to say, people were not happy about this, and Wells Fargo has lost much of the trust it had spent years building up.

Wells Fargo promised to pay a total of $6.1 million to customers who had improper fees as a result of this business practice, fired 5,300 employees, and had their CEO step down.

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