Sunday, November 6, 2016

Wells Fargo: are the economies of scope big enough?

Wells Fargo's chief re-interated his commitment to "cross-selling" various financial products, taking advantage of economies of scope (it is less costly, or more profitable, to sell multiple financial products to a customer).

However, implementing this strategy with incentive payments resulted in as many as 2m phony fee-generating bank accounts and credit cards, created without customers’ knowledge. This disclosure has wiped $23bn off its Wells Fargo's stock valuation.

 At an investor conference, Wells Fargo chief Tim Sloan re-committed to the practice:
“There’s nothing wrong with cross sell done right.”

To do it right, he has to come up with a way to verify that the accounts are real.


  1. Great example of where theory meets the dynamics of real-world application. Economies of scope should be achievable between multiple product offerings, but the incentives of workers are tied exclusively to reported numbers of associated sales. It seems that incentives are at least aligned with the company's goal of increasing revenue (and hopefully aligned well with profitability), but that they fail to properly account for the integrity of the numbers being reported.

    Some sort of oversight and verification procedure might be employed to address this specific concern as new sales are entered and new accounts created. This will need to be dealt with as much as possible on the front end to avoid retrospective changes on the back end after commissions have been paid and quarterly results issued to the public. I would be curious to see how they implement controls around verification of new sales and accounts going forward, and the extent to which that process would be automated.

    A likely trend based on the readings in the book is that management tends to overestimate the amount of synergies that would be captured by the firm in any sort of combination, and that real-world problems such as the one above tend to erode those projected synergies.

  2. Brittany HippenstielNovember 12, 2016 at 7:48 AM

    I work for a financial institution where I am monetarily rewarded for the products I sell and refer. I am rewarded for each credit card sale, each merchant sale, and each qualified account. The rest of the sales and referrals go towards a "team" goal for my entire office. With this being said, I believe that he morals of my company and the people that work there play a huge role, as to why this horrible situation has not happened to our company. As we get paid for the above and beyond, I couldn't imagine ruining a customer relationship, and MUH future business for a $20 incentive.

    Our company does have a system that we use, that is closely monitored by higher management. We have to do follow ups, and report back each product, and/or each customer with comments and contact info. I think the fact that our management is always looking at this allows us to feel like a slip up like the one at Wells-Fargo isn't even an option, even if there was temptation. Cross selling and monetary compensation is a norm for most companies in the same or similar field, and I think hiring process, follow up, and constant training is a great plan to eliminate a situation to occur. I think making the guidelines known, consistently, will also help avoid the error to occur.

  3. Sales goals within an organization can be beneficial for the organization, however they can also be dangerous. When an employee feels their job is dependent on their sales goals they may become desperate, which was the case for Wells Fargo. While this is illegal, an employee may feel they have no choice. I worked for a bank where your job depended on sales goals. I was an acting branch manager and they asked if I would take a promotion to manager. I refused the promotion because I knew too many other managers who lost their jobs because they didn’t meet their sales goals, even though they worked hard. For example one of the branches may have had a sales goal of three mortgages a month, if that branch manager only opened one mortgage three months in a row they would fire the manager. I did not like working under these conditions, where my job depended on no only having someone interested in a product walk into my branch but also making sure they qualified for the loan or product. I quit this job shortly after, however I can see from that experience where an employee may be desperate, as illegal as these actions are, Wells Fargo played a role in making such strict requirements for an employee to retain their jobs.

  4. I worked at a bank in Ghana that had a high pressure sales culture. We were given impossible sales quotas to reach, and if we were unable to reach the target, we were berated or fired . So most of us usually go to people's office to sell our brand by convincing them as to why it's good to open an account at our bank. Some of these customers especially our male customers always try to take advantage of us. Some even request sexual favors in other for them to deposit their money at the bank.
    I eventually had to quit because I became very uncomfortable ;I could not meet with the huge demands that the bank has set for me at the end of each month.
    This is similar to what happened at Wells Fargo where employees were given impossible sales quotas to reach, and had no option but open as many as two million bank and credit card accounts on behalf of its customers, without their authorization.
    The bank should be transparent and accountable .There should be clarity in the provision of public information and improvements to internal controls. To repair the serious flaws that have been exposed, there should be Proper supervision and enforcement, If contrarian thinking is also encouraged it will go a long way towards achieving financial accountability.

  5. Wells Fargo used the business practice “economy of scope”, which occurs when the price of manufacturing two products together is less than the cost of producing those two products separately. I believe that they were so interest in saving and making money that they did not look at the whole picture. A lot of crooks took full advantage of it and opened up fraudulent accounts and put a lot of innocent people in debt due to identity theft. Wells Fargo chief made the statement that there is nothing wrong with cross selling if it is done right, but I doubt those customers who lose money because of it is happy and in the long run, Wells Fargo might lose customers because of it and that will definitely decrease their profit. This kind of falls under the hidden cost fallacy which occurs when you ignore relevant cost such as losing customer accounts. Technically, it isn’t a cost but a loss of profit, but the principle is still the same. Although this can be an important source of competitive advantage and can shape acquisition strategy, this did not seem to work for Wells Fargo, because there strategy was picked up by thieves who took advantage of it. (Luke m., Froeb, Brian T. McCainn, Mikhael Shor, and Michael R. Ward 2016)


    Luke m., Froeb, Brian T. McCann, Mikhael Shor, and Michael R. Ward 2016. Managerial Economics. Published by Cengage Learning