Banks Make Changes Following Wells Fargo Crisis


incentive-12-16-16.pngIt seems almost everyone with a bank account knows the story: a relatively small group of people within a large organization committed fraud by opening unapproved customer accounts in order to earn performance bonuses under a production-based incentive plan. The scandal badly bruised the bank’s stellar reputation, forced the CEO to step down, and resulted in a significant loss of shareholder value, before the election turned the tide for many bank stocks.

It has also prompted a widespread industry examination of retail incentive practices. Whether it is through the OCC’s horizontal review of sales and marketing practices or board requests at smaller community banks, the industry is taking a look at both the cultural aspects of sales expectations and the design and controls of the programs themselves.

In November 2016, Pearl Meyer conducted a survey of actions banks are taking to address the potential issues uncovered by the scandal. This study included 57 respondents representing both small and large institutions across the country. The key outcomes indicate that four out of five banks have had an internal or external inquiry regarding their retail incentive plan practices. Most banks are unlikely to make significant changes to their retail incentive plan design and instead are focusing on communication and training as well as enhanced documentation, controls and monitoring.

The aftermath of the Wells Fargo scandal will be that banks are expected to examine their retail incentive programs and the controls supporting them. To that end, we believe there are five questions that banks should ask and answer with respect to their retail incentive programs.

What does our plan reward? About half of respondents to our bank survey indicated using volume metrics and cross-selling metrics (55 percent and 47 percent respectively), which have been criticized as a part of the scandal. However, few are planning to discontinue these metrics (6 percent to discontinue volume and 4 percent to discontinue cross-selling). Use of either metric may put additional pressure on banks to demonstrate how their controls and administrative procedures curtail fraud or misconduct.

Approximately 70 percent of respondents use growth metrics and 34 percent use profitability or revenue, which are much more difficult to manipulate. Nearly one-third have a discretionary component for branch or individual performance that can help reinforce positive behaviors and “right size” awards.

How is our plan monitored? Participants received inquiries from executive management (72 percent) and their boards (51 percent) who may be unfamiliar with the specific details of the retail incentive programs. Banks are addressing the additional oversight through increased monitoring and controls (46 percent) and greater reporting to senior management or the board (42 percent). Reporting elements need to remedy the fact that boards have a responsibility to ensure the bank’s incentive compensation arrangements do not encourage inappropriate risk. Directors often have no visibility into retail incentive plans, have no easy way to quickly understand the impact, do not know what their rights or authority are in understanding, determining, and remedying the risk, and have no plan for how to react. These issues need to be addressed to appropriately monitor the risk.

Are our expectations reasonable? The last element of reporting—how many employees are meeting performance goals—can identify unreasonable expectations or flag the need for better training or management. Collecting performance data over time to see trends in performance, expectations and payouts may also prove useful.

What are our customers experiencing? More than a quarter of respondents indicated that they will develop or enhance their customer complaint process. The process should not only handle specific complaints but also aggregate the complaint types to identify systematic breakdowns in the customer experience.

Are we staying true to our values? Critics have indicated that perhaps the largest failing at Wells Fargo was an environment where branch staff feared that nonperformance would result in job loss. Monitoring of employee satisfaction by business line and mechanisms to provide feedback without repercussions can help identify problems before they escalate.

Given the large-scale publicity of the Wells Fargo scandal, someone—customers, employees, regulators, or shareholders—will likely ask how your retail incentive program is different and what you have done to protect against fraud or misconduct. Accordingly, banks should conduct an assessment of retail incentive plan designs, risks and controls, as well as gain a better understanding of the branch sales culture and leadership.

The Seven Facets of a Digital Bank


If one were to start a new digital bank today, what would the defining characteristics be? Although there are some similarities to traditional bank counterparts, digital-only banks are in many respects very different. Here are the seven facets of a digital bank that will help drive its success.

Adjacent to each facet are organizations, including digital-only and traditional banks, as well financial technology companies, that Bank Director believes embody each characteristic.

How to Make Your Bank Customer-Centric


5-7-13_Celent.pngWinning retail banks will provide a different and better offer of value. They will:

  • Be customer-centric (finally) by delivering more than simply plumbing
  • Have a strong digital offering (mobile, tablet and online)
  • Turn zero-sum games into win-win situations

Here’s the cold, hard truth: Retail banking today is a means to an end for customers. Banking lets people accomplish other, more enjoyable things. Banking is not fun; it’s not a destination; and it’s not something that people would choose to do given any reasonable alternative. With the products and services that banks offer today, most often the highest praise that can be given is, “That wasn’t terrible.”

So what can banks do to change the game so that they have a realistic chance of having their customers actively praise them? Three actions, driven by technology and spurred by non-bank competition, can help banks transform customers’ feelings about them.  

First, banks should (finally) become truly customer-centric. The industry has been talking about this for a dozen years, but this time—really—it’s getting serious. Here’s why: Technology has advanced enough to make a host of truly useful solutions feasible, and consumers are demanding to be served differently now.

Exposed to great online experiences from Amazon to Zappos, customers wonder, not unreasonably, why banks can’t do the same?  And when the banks fail to deliver, frustrated financial services consumers begin to look around for someone who can do a better job delivering on their raised expectations.  

Second, banks must have a strong digital offering. This encompasses not just online, but also mobile and tablet devices. Bank of America predicts that in less than two years it will have more customer access accounts via mobile devices than through the online channel. And more than half of millennials now choose their bank based on its mobile experience.  

Third, banks should create win-win situations with the customers. The retail banking business model has been constructed as a zero sum game: Banks win when customers lose, and vice versa. There’s a finite pie that banks and customers have to share, and one group’s piece grows as the other’s shrinks. That’s not the basis for a fruitful relationship.  

Bankers should search for ways to create positive-sum games by aligning the interests of the bank with those of its customers. When the customer does well, the bank benefits. For example, banks can increase assets by helping customers understand (and act on) the need to save for retirement.  

Win-wins can also take the form of partnerships with third parties by delivering value to customers that they wouldn’t be able to get on their own. With some merchant offers, for example, banks can provide value to small business (i.e. new customers) and retail customers (in the form of discounts).

A bank’s internal organization is typically the biggest barrier to delivering a truly customer-centric experience. Banks have gotten away with a lot for a long time because alternatives were few and customers were conditioned not to expect too much. But that paradigm has been irreversibly altered; banks can’t let antiquated organizational silos stand in the way of delivering new value to newly empowered customers.  

Changing will be hard, but guess what? Customers don’t care. They don’t care about legacy systems, or regulatory burdens or organizational structure. They want what they want, and will be delighted when you surprise them with something that they didn’t even know they needed.  

Maxims for a customer-centric bank in the mobile age:

  1. Put the customer first and be in his or her corner
  2. State your offer of value clearly
  3. Save your customers time
  4. Save your customers money
  5. Let them know when they’ve done well