John Stumpf, Chairman, President, and CEO of Wells Fargo & Company, discusses the importance of Wells Fargo’s branch network, misconceptions about millennials, payments innovation, and the “real” economy with Jim Aramanda, President and CEO of National Unrecovered Financial Services.
Jim Aramanda, NURFS: Let’s start with congratulations on Wells Fargo becoming the world’s largest market cap bank.
John Stumpf, Wells Fargo: That’s nice of you to say. We think we’re an old-growth company, like an old-growth forest. This is our 164th year of business, and it’s quite a story. I think we have some of the best times yet in our windshield and not our rearview mirror. In spite of a lot of the challenges, I think it’s an exciting time to be a bank.
Aramanda: Most indicators are looking up; oil prices are low, and the economy is still growing. What are you seeing in terms of growth for Wells Fargo in its business lines?
Stumpf: Ninety-seven percent of our revenues are in the U.S. While we love our international business, it’s more of an adjunct to what we do domestically. For a large institution, we’re more of a Main Street bank, in that virtually everything we do has a U.S.-based customer on the other end of the transaction. We are seeing lots of mortgages, auto loans, and small-business deposits and small-business loans. In the commercial space, we are very active in oil and in commercial real estate.
The weakest thing about the U.S. is the rest of the world. The U.S., in and of itself, is benefiting from low oil prices, even though that’s hard on the oil producers. Commercial real estate is booming; the private sector infrastructure spend is ahead of the public sector infrastructure spend. Agriculture is doing relatively well. I think there’s going to be a pretty good crop year this year, although prices seem to be down a bit. Areas of particular strength would be auto, technology, distribution, and commercial real estate. The consumer is also in much, much better shape than he or she has been in a number of years. Because interest rates are so low, the actual debt-carrying capacity is back to what it was 20 or 30 years ago, so there is a lot to be encouraged about.
However, not all things are going well. Wage growth has been slower than expected. The economy, while improving, has been uneven. Again, I think the rest of the world’s economic impact is the biggest risk to a continued and sustained recovery in the United States.
The area that has probably the biggest influence on America — because the dollars spent on this category are multiplied through the economy — is housing. While housing is better, and we’ve had the best housing year since the downturn, it’s still not back where it was pre-downturn. That’s for a number of reasons, not any one of which is the dominant factor, but in aggregate, it matters.
In some cases, there’s lack of inventory in certain areas. In many of the West Coast cities, you bid on houses, just like you have to do in the New York City boroughs or even in places like Denver. Lack of inventory is part of the problem.
Consumers are also waiting until later to buy a home. That’s a bit of a challenge. Credit is also hard to get for some of the higher-risk borrowers or first-time borrowers. Also, student debt is a limiting factor in some cases. In each one of those situations, it is not a deal breaker in and of itself, but in aggregate it matters.
Aramanda: What do you think needs to be done that would spur either economic growth or job creation?
Stumpf: Clearly, housing is a big driver in that. With a house purchase comes a lot of other purchases, such as furniture and appliances. I think to make credit more available and to have some more certainty with how FHA and the GSEs enforce their reps and warranties would help.
I think having our legislature get fully on board with a pro-growth strategy would be helpful. Leveling the playing field so manufacturing would come back to the country would be helpful as well.
A lot of good things have happened, but we really need to unleash the American ingenuity and spirit, because we’re not going to save our way to a growing economy. I know balancing budgets is important, but we have to grow our way out of this. The pro-growth agenda is the key here. People want to buy what the United States makes. We have a world ready to buy our products and services.
Aramanda: The next question regards a study that Wells Fargo did earlier this year on the “real” economy. You find that there’s a difference between how people view the national economy versus the local economy. What did Wells learn from this survey, and were there any surprises?
Stumpf: Yes. First of all, the recovery has been a bit uneven in that it’s become more regional. This is something we’re exploring in-depth through a partnership on economic issues with USA TODAY. When the downturn happened in 2008-’09, the tide went out everywhere and all boats went down. Now, the recovery is based on the unique characteristics of a geographic area. The Bay Area has probably never been stronger. We are blessed here with an educated workforce, people want to live here, and technology — especially software and social media — is driving the economy. Things are booming.
There are other parts of the country that are more conditional or more dependent on retirement or recreation or real estate, and those are not enjoying a strong recovery.
However, there are a couple of things that are true across the country. Seventy-five percent of Americans want to own a home. Homeownership, today, is in the 61% to 62% range. Even though people are delaying home buying for whatever reason, they want to own a home. That’s important.
Aramanda: Hasn’t that percentage — somewhere in the low 60% range — stayed fairly stable over time?
Stumpf: Yes. Actually, homeownership got to almost 70% in 2008 after it had been in the 63% to 65% range for years. Through all of the aggressive lending that happened between 2000 and 2008, we got over the top. Now, it’s down below the 20- or 30-year average.
That’s not a good thing, and it’s still heading south. There’s still the desire to own a home; a majority of Americans still believe that’s part of the American dream.
Small-business and consumer confidence continues to be quite high, which is important. We’ve not had much government interference in that confidence. We’ve not had fiscal cliffs and debt ceilings and so forth to deal with in the last 6 to 12 months, which has been helpful.
There is a sense of optimism but also caution. Companies and consumers are cautious. After 2008, when the housing market that was owned by 70% of Americans blew up, everyone felt poor. Whether you owned your home outright or you had a 120% mortgage on it, you felt poor. This will have some lasting impact on this generation’s psyche.
Aramanda: Much like the Great Depression had a lasting impact on our parents.
Stumpf: Exactly. My parents are 93 and 88; they still talk about the Great Depression. I also think there’s a belief that government won’t be there for them when they retire the way they thought it would. Families are now saving 7% to 8% of their paychecks and that was unheard of 10 years ago. Not all of this is bad, but I think there is a recalibration about spending now and paying back later.
Aramanda: Moving on, across the industry loan growth is outpacing deposit growth everywhere, except at Wells Fargo. What’s driving the deposit growth at Wells?
Stumpf: We’re almost fanatical about growing deposits. We have a number that we all know. It reflects some of the investments we’ve made in what I would call the omni-channel: branches, ATMs, online, mobile, and phone. What we’re finding is that you need all five points of distribution to be competitive on deposits. People will borrow money almost anywhere.
But they’re fussy about where they put their deposits. It’s what they live out of, and they’re looking for convenience, value, and assurance. We have learned that to grow in the deposit business, you have to be relevant to a customer when they want to make that choice.
Some of our millennial customers claim they never come into one of our banks, yet 75% do, every six months. They open their first account, generally, with a bank that has a branch within two miles of where they grew up. They might not go back to it, but the bank branch acts as a promise, a commitment that their money is safe: If I ever have a problem, I can go there. If Uncle Leo dies and he leaves me an inheritance, I’ll take it there. Even though that might be only used once every six months, it means more than that.
I like to give the following example. We love Chicago. As they say, it’s our kind of town. We have our insurance business headquartered there, and we have 700 professionals there. We have our largest middle market commercial banking office there. Do you know how many new, primary retail checking accounts we opened in Chicago last year? Maybe a handful. Hold that thought.
Compare that to Atlanta, which is not that different in the size of the community. We don’t have the luxury of having our insurance company headquartered there, and we have commercial bank offices there, but they are not as large as in Chicago. Do you know how many new, primary checking accounts we opened in Atlanta last year? Thousands and thousands. The difference? We have no branches in Chicago. We have the No. 1 branch network in Atlanta. You can’t tell me those are not important.
Aramanda: That’s interesting, and it leads me to my next question regarding the future of traditional bank branch.
Stumpf: That does not mean you have to have a 5,000-square-foot branch and a 10-foot sign. We’re building smaller branches with a 5,000-square-foot sign, because it means something different today. We’re automating the branches. We’re now image capturing in all of our stores, so we send our cash letters electronically. Maybe our physical branches won’t be important in the future, but for right now, for this generation, a branch presence is hugely important. We’re gaining market share.
We are seeing that millennials change their behavior with respect to the kind of companies that they do business with and patronize. They’re comfortable with Apple, Google, Amazon and other large companies, and they see the value in the distribution, the technology, and the convenience that large brands like Wells Fargo bring them.
We are gaining share. Think about this: We are growing net primary checking accounts by 5% to 6%. We’ve been doing that steadily. We’ve never had growth like that, ever.
Aramanda: That throws into question much of the common thinking about millennials, I would say.
Stumpf: It’s absolutely true that millennials are digital natives. It’s absolutely true that mobile is probably their most dominant channel, but we’ve learned something very interesting. The quality and the functionality of the ATM network has a bigger influence on how they think about the bank than all the bells and whistles on online or mobile, because that’s where they go for their distribution.
If your bank has old, clunky ATMs that are first-generation cash spitters, it reflects very poorly on the overall organization. We’re putting much of our innovation into our ATM network and it reflects very positively on the overall distribution. For example, you go to our machines, you put your code in, and a message will automatically pop up: “Do you want $100 with no receipt, like you had last time?” That is the default. It will wish you a happy birthday on your birthday. It will wish you a happy anniversary on your bank anniversary. You can get your reward points in cash out of the ATM machine. By early next year, hopefully, you will be able to go to an ATM with your phone and activate the machine. We’re doing lots of things that might be thought of as old technology, but it really is magic for us.
Aramanda: If it can remind me of my wife’s birthday and our anniversary, I’ll be a customer.
Stumpf: The reason we love checking accounts so much — they call them current accounts in Europe — is that where you have your checking account is where you say you bank.
Aramanda: That is true. So branch banking is, in your view, a channel that is here to stay?
Stumpf: Yes. For right now, it surely is. We don’t know how to grow without it. We can’t grow without it. But, we have taken the total square footage of the bank from 117 million square feet at the time of the merger with Wachovia in January of ’09, to about 92 million square feet today, and we’re continuing to go down from there. So we’re doing more business with more customers with fewer square feet. And the location, the physical distribution, is not shrinking.
Aramanda: Interest rates have been at zero or near zero. The Fed has signaled that it may raise rates soon. What’s your feeling about this low interest rate environment?
Stumpf: Here’s how we think about rates. It would not surprise us if there was a 25 basis point move at some point in the near term, in other words, Fed funds. But I think rates are going to be stubbornly low for a much longer period of time, because the rest of the world is weaker. Even 2% for the 10-year Treasury is a big rate for the rest of the world. Some places you have negative interest rates. I don’t think you’re going to see much movement on the rate side. Cost management is clearly important for all of us. Virtually every organization I know is doing that. You might not see cost containment in the absolute numbers, because we’re all spending a lot more money on compliance, including cyberrisk. At Wells Fargo, we’re also developing new innovations on payments and other things to make our value proposition more relevant to more customers.
At the same time, there are products and services that are being challenged today that many banks believed were birthrights. These changes are making our business more challenging. Take overdraft revenue for example. We’ve given up a fair amount of overdraft revenue because we think it’s the right thing to do for our customers. We’re sending customers notifications about what items will post to their account the next day so they can make adjustments and deposits to avoid things like overdraft fees.
Aramanda: Your comments lead to my next question regarding what can be done to improve our industry’s reputation in the public’s eye.
Stumpf: I’m convinced more than ever that you can’t take on emotion with facts. When you have emotion and facts in an argument, emotion always wins.
We can continue to improve the industry’s reputation by enhancing the experience customers have. If we all do a good job with our customers, we will create a different emotion and change their perception. It’s one customer at a time, knee-to-knee, street corner by street corner. We are making some progress, but it’s going to be a slow way back.
If you look at history, the banks were vilified from the Great Depression right up to World War II. Now, I’m not in any way suggesting a war, but I am saying this is a long process and I cheer for any of our competitors who win with their customers, because when they win, we all win. And when one of us loses, we all lose.
Aramanda: Well put. I don’t want to dwell on regulatory things, but some of the regulatory trends affecting our industry may be impacting growth. Where do you see growth coming from for you?
Stumpf: The regulatory environment is difficult. There’s no question about that. But one of the real benefits of our regulatory system is a strong, well-capitalized, transparent financial services industry. That’s a gift to a country. This is very important. Show me a strong country that’s got a weak banking system. There aren’t any.
That’s not to say we don’t have to get the regulations right. We need balance, and our nation’s leaders have to understand some of the unintended consequences of regulation, which ultimately hurt consumers. Also, we have three or four regulators weighing in on one issue. Each may see it differently. There may be different hot points. That’s the most challenging part.
That’s the hardest thing. Given this, we’re navigating the best we can. For large institutions like ours, virtually all of our growth will be organic.
Aramanda: The last question is about payments. There are a lot of technology firms, startups, and venture funds getting into the payment space. What are your thoughts on how banks continue to compete in this space?
Stumpf: Here are a couple of things that I worry about, and we see this in spades, because we’re out here headquartered in the heart of where much of the innovation that’s going on. If you think of Square, PayPal, Venmo, Apple, and Google, they’re all here. And all of them innovate at the speed of the Internet. We innovate and move at the speed of regulation. So, there’s an automatic incongruity there. Second, most of these innovators are looking for a piece of the revenue stream and are pretty effective in doing it in a way that leaves most of the regulatory work with the banks. They also advertise their product in a way that almost suggests the bank is working in partnership with the innovator and that the bank’s there to help you. If you have a problem, go see your bank.
The playing field is anything but level, and customers are actually pushing for a lot of this stuff. The complaints we receive have gone from mortgage foreclosure complaints to complaints that it’s too slow to do business, too hard to get a mortgage, or even why we don’t let a customer deposit a $25,000 check through mobile pay by taking a picture of it? Everyone wants zero liability. But if that check is negotiated twice, whoever owns the paper is in the best place.
When you’re highly regulated and you’re held to almost a zero compliance tolerance for AML/BSA, plus you have a zero liability to the customer, of course we’re moving at a different speed. That’s some of the challenge we have as an industry. It doesn’t mean that we can’t be effective, but it is a real challenge for us.
The value of zero liability to the customer is also an asset. When it comes to liking your bank, our numbers have never been higher. People love us. And I think people do trust their local bank, whether it’s a Bank of America, Wells Fargo, or whatever bank they use. They like their local bank. And that’s a huge asset for us.
Aramanda: Yes. The biggest asset we have is trust.
Stumpf: And trust is why we’re spending so much money on all things cyber. Cyber and payments. I think from our investment perspective, those are the two cash hogs at the trough, because we don’t know that we can ever spend enough in those areas.