Business 2.0 Magazine, G. Pascal Zachary, 12 June 2006
Received wisdom in the business world has it that there are "devil customers" and "angel customers" - and your company's profits, if not its very soul, ride on your ability to rid yourself of the first and attract the second.
That's nonsense, according to Dick Kovacevich, CEO of Wells Fargo. He says there's no such thing as an unprofitable customer - just one you haven't figured out how to make money on yet. And, he argues, if a customer is truly unprofitable, that's the company's problem, not the customer's.
Following theories like this is just another way the $40.5 billion San Francisco-based banking and mortgage giant has defied convention under Kovacevich and outperformed the rest of the industry. (Wells Fargo shares have grown three times faster than other bank stocks since Kovacevich became CEO in 1998.) From charging into online banking before other big banks to opening branches while rivals were shutting theirs, Wells Fargo has zigged where others zagged.
Kovacevich also shows unconventional thinking about diversity in the ranks of both his employees and his customers. While most CEOs reflexively nod toward diversity as good for public relations, Kovacevich unabashedly says that recruiting employees who reflect your customer base is a strategy that drops straight to the bottom line. He laid out the math for Business 2.0 in a recent interview.
Wells Fargo thinks of itself as a retailer - you even call your branches "stores." But most retailers are heavily segmented: There are customers they want and customers they don't want. When I walk into one of your branches, I see all kinds of customers. How do you pull that off and make money?
There is an altruistic part of it, in that we do think that we need to do our part in the community and serve all. Also, our team members don't want to be in an elitist organization. But we also fundamentally believe that we can be profitable with all segments of society.
Perhaps we have to work harder at the lower income levels. But it's our fault if a customer is unprofitable. It's because we haven't done a good enough job of convincing them to give us all their financial business instead of just a piece. And when you believe that, then you get more internally focused. You're the problem, not the customer.
Why isn't the rest of the industry following your lead?
I think a lot of banks are very shortsighted. They look at their profitable customers today and make big assumptions: that all those customers were profitable when they first started banking with them, or that they could distinguish at that time which ones were going to become profitable. And I don't believe either of those is the case.
We believe that by serving a large group today, even if some customers turn out to be unprofitable over their lifetime with us, there will be a lot of others who will be even more profitable than we expected. By not segmenting, the challenge we have is effective execution, not so much changes in the economy or not having enough opportunities for revenue. And we'd rather be rewarded for what we can manage than what we can't manage. We like our model. It's definitely harder, but if we execute it effectively, it should outperform the others through all economic cycles and time frames.
Branches - sorry, stores - are an expensive way to conduct transactions. Why are they still important?
Every transaction is an opportunity to engage a customer - both to satisfy a transactional need and also to sell him something. And the transaction actually gives you an understanding of customer needs or another new opportunity. If you come in and cash a check from Fidelity, one of our tellers or someone should ask "Could we introduce you to an investment consultant to see if we can do a better job for you than Fidelity?" and so on. So store traffic is good even though it can be more costly, because transactions give us an opportunity to understand and satisfy a customer's need, and therefore make new sales.
And I would just ask two rhetorical questions: Who over time have been the better merchandisers, retail stores or banks, in terms of their ability to attract customers and serve them well? Most people would say retailers have been more effective than banks. And I'd ask the second rhetorical question: How many retailers don't want customers in their stores?
I've banked with Wells Fargo for a long time, and I remember when the branches were like mausoleums. Now they're buzzing. What are all those people doing?
Besides what you might call traditional bankers, you're seeing a mortgage consultant, an insurance agent, and brokers. We've also roughly doubled the number of bankers in our stores over the past four or five years.
Now a lot of that's predicated on having a capable workforce. And, let's be frank, teller jobs don't pay very well. How do you get the quality of people you need?
I think we're an employer of choice for several reasons. Most of these jobs we would describe as entry-level jobs, but that is not necessarily where someone is going to end up. We've got personal bankers who handle customers with money-market accounts and CDs, and private bankers who are more like relationship managers for investments, insurance, and so on. When we're recruiting for those positions, our No. 1 source of personal bankers is our tellers, and our No. 1 source of private bankers is our personal bankers.
I know firsthand that in California you have a very diverse workforce. In some branches, I'd guess one in three workers is foreign-born. Have you thought about why you employ so many immigrants?
Well, first of all, our customer base is that way too. So we need a diverse workforce to better serve our customer base. There's certainly a lot of cultural familiarity that is important, as well as language skills.
And unfortunately, there are corporations that aren't as welcoming to diversity. There's accidental and not-so-accidental discrimination. We will go out of our way to help with issues related to diversity - for example, we'll give people language classes, and we'll make sure our supervisors know that they may ask more questions and have some problems for a while.
How does that pay off for Wells Fargo?
We think it's the right thing to do, but also these people, if they become loyal to Wells Fargo, are going to tell a lot of people about their positive experience working here. Once you have people saying "Hey, this is a great place to work, I love it" - well, word of mouth in these communities is much more effective than advertising.
One of our fastest-growing areas is mortgages for first-time homeowners, and more than half of first-time homeowners come from minority groups. Almost all of that is done by word of mouth. That's going to do nothing but grow. We may make a little more money or lose a little money in that today, but it's definitely going to pay off in the future.
You've recently introduced some new Internet-based tools, like a report that categorizes spending whether it's done through a checking account or credit card and scanners that let small businesses deposit checks electronically. Why don't we see that kind of innovation in banking more often?
You know, I started in business working at General Mills. I don't think the banking industry is particularly at the leading edge. We probably learn more from other industries than we teach them. That's why I'm on the Target board. I think retailers are 20 years ahead of banks in their thinking.
Please don't tell your readers, but our checking accounts aren't really much different than Bank of America's, OK? It's the way we distribute our products that's different. We have a lot more in common with other distributors of commodity products than we do with other banks. Most of the products that Target and Wal-Mart carry are similar, and the way you buy them is similar. Or take Home Depot. The products aren't what distinguishes Home Depot; it's the way they put a plumbing store and a paint shop and so on under one roof.
And so we're doing that with financial services. We're taking what were commodity products delivered through multiple sales forces and putting them all under one roof so the consumer can come in and choose which products make sense. Before, you had to go to a banker, a broker, or an insurance agent for a CD, a mutual fund, or an annuity, and yet they were all trying to satisfy some sort of a long-term savings need. The risks and rewards are different, and you had to pay three different salespeople to bring those to you, and then you had to decide which one made sense because you figured the salespeople were all biased, right?
Now you can come to a Wells Fargo and we can talk to you about the costs and benefits of a mutual fund vs. a CD vs. an annuity and give you some advice - and we're agnostic because we're not just selling CDs. We can say "OK, what's best for you?" Other businesses have figured out how to do that in retail, and we have now figured out how to do it in banking. Eventually, maybe some of our competitors will too.
;
Received wisdom in the business world has it that there are "devil customers" and "angel customers" - and your company's profits, if not its very soul, ride on your ability to rid yourself of the first and attract the second.
That's nonsense, according to Dick Kovacevich, CEO of Wells Fargo. He says there's no such thing as an unprofitable customer - just one you haven't figured out how to make money on yet. And, he argues, if a customer is truly unprofitable, that's the company's problem, not the customer's.
Following theories like this is just another way the $40.5 billion San Francisco-based banking and mortgage giant has defied convention under Kovacevich and outperformed the rest of the industry. (Wells Fargo shares have grown three times faster than other bank stocks since Kovacevich became CEO in 1998.) From charging into online banking before other big banks to opening branches while rivals were shutting theirs, Wells Fargo has zigged where others zagged.
Kovacevich also shows unconventional thinking about diversity in the ranks of both his employees and his customers. While most CEOs reflexively nod toward diversity as good for public relations, Kovacevich unabashedly says that recruiting employees who reflect your customer base is a strategy that drops straight to the bottom line. He laid out the math for Business 2.0 in a recent interview.
Wells Fargo thinks of itself as a retailer - you even call your branches "stores." But most retailers are heavily segmented: There are customers they want and customers they don't want. When I walk into one of your branches, I see all kinds of customers. How do you pull that off and make money?
There is an altruistic part of it, in that we do think that we need to do our part in the community and serve all. Also, our team members don't want to be in an elitist organization. But we also fundamentally believe that we can be profitable with all segments of society.
Perhaps we have to work harder at the lower income levels. But it's our fault if a customer is unprofitable. It's because we haven't done a good enough job of convincing them to give us all their financial business instead of just a piece. And when you believe that, then you get more internally focused. You're the problem, not the customer.
Why isn't the rest of the industry following your lead?
I think a lot of banks are very shortsighted. They look at their profitable customers today and make big assumptions: that all those customers were profitable when they first started banking with them, or that they could distinguish at that time which ones were going to become profitable. And I don't believe either of those is the case.
We believe that by serving a large group today, even if some customers turn out to be unprofitable over their lifetime with us, there will be a lot of others who will be even more profitable than we expected. By not segmenting, the challenge we have is effective execution, not so much changes in the economy or not having enough opportunities for revenue. And we'd rather be rewarded for what we can manage than what we can't manage. We like our model. It's definitely harder, but if we execute it effectively, it should outperform the others through all economic cycles and time frames.
Branches - sorry, stores - are an expensive way to conduct transactions. Why are they still important?
Every transaction is an opportunity to engage a customer - both to satisfy a transactional need and also to sell him something. And the transaction actually gives you an understanding of customer needs or another new opportunity. If you come in and cash a check from Fidelity, one of our tellers or someone should ask "Could we introduce you to an investment consultant to see if we can do a better job for you than Fidelity?" and so on. So store traffic is good even though it can be more costly, because transactions give us an opportunity to understand and satisfy a customer's need, and therefore make new sales.
And I would just ask two rhetorical questions: Who over time have been the better merchandisers, retail stores or banks, in terms of their ability to attract customers and serve them well? Most people would say retailers have been more effective than banks. And I'd ask the second rhetorical question: How many retailers don't want customers in their stores?
I've banked with Wells Fargo for a long time, and I remember when the branches were like mausoleums. Now they're buzzing. What are all those people doing?
Besides what you might call traditional bankers, you're seeing a mortgage consultant, an insurance agent, and brokers. We've also roughly doubled the number of bankers in our stores over the past four or five years.
Now a lot of that's predicated on having a capable workforce. And, let's be frank, teller jobs don't pay very well. How do you get the quality of people you need?
I think we're an employer of choice for several reasons. Most of these jobs we would describe as entry-level jobs, but that is not necessarily where someone is going to end up. We've got personal bankers who handle customers with money-market accounts and CDs, and private bankers who are more like relationship managers for investments, insurance, and so on. When we're recruiting for those positions, our No. 1 source of personal bankers is our tellers, and our No. 1 source of private bankers is our personal bankers.
I know firsthand that in California you have a very diverse workforce. In some branches, I'd guess one in three workers is foreign-born. Have you thought about why you employ so many immigrants?
Well, first of all, our customer base is that way too. So we need a diverse workforce to better serve our customer base. There's certainly a lot of cultural familiarity that is important, as well as language skills.
And unfortunately, there are corporations that aren't as welcoming to diversity. There's accidental and not-so-accidental discrimination. We will go out of our way to help with issues related to diversity - for example, we'll give people language classes, and we'll make sure our supervisors know that they may ask more questions and have some problems for a while.
How does that pay off for Wells Fargo?
We think it's the right thing to do, but also these people, if they become loyal to Wells Fargo, are going to tell a lot of people about their positive experience working here. Once you have people saying "Hey, this is a great place to work, I love it" - well, word of mouth in these communities is much more effective than advertising.
One of our fastest-growing areas is mortgages for first-time homeowners, and more than half of first-time homeowners come from minority groups. Almost all of that is done by word of mouth. That's going to do nothing but grow. We may make a little more money or lose a little money in that today, but it's definitely going to pay off in the future.
You've recently introduced some new Internet-based tools, like a report that categorizes spending whether it's done through a checking account or credit card and scanners that let small businesses deposit checks electronically. Why don't we see that kind of innovation in banking more often?
You know, I started in business working at General Mills. I don't think the banking industry is particularly at the leading edge. We probably learn more from other industries than we teach them. That's why I'm on the Target board. I think retailers are 20 years ahead of banks in their thinking.
Please don't tell your readers, but our checking accounts aren't really much different than Bank of America's, OK? It's the way we distribute our products that's different. We have a lot more in common with other distributors of commodity products than we do with other banks. Most of the products that Target and Wal-Mart carry are similar, and the way you buy them is similar. Or take Home Depot. The products aren't what distinguishes Home Depot; it's the way they put a plumbing store and a paint shop and so on under one roof.
And so we're doing that with financial services. We're taking what were commodity products delivered through multiple sales forces and putting them all under one roof so the consumer can come in and choose which products make sense. Before, you had to go to a banker, a broker, or an insurance agent for a CD, a mutual fund, or an annuity, and yet they were all trying to satisfy some sort of a long-term savings need. The risks and rewards are different, and you had to pay three different salespeople to bring those to you, and then you had to decide which one made sense because you figured the salespeople were all biased, right?
Now you can come to a Wells Fargo and we can talk to you about the costs and benefits of a mutual fund vs. a CD vs. an annuity and give you some advice - and we're agnostic because we're not just selling CDs. We can say "OK, what's best for you?" Other businesses have figured out how to do that in retail, and we have now figured out how to do it in banking. Eventually, maybe some of our competitors will too.
