Wells Fargo (NYSE: WFC ) has been perhaps the most successful big bank of the past decade, both in terms of growing geographical footprint and profitability. In the past 10 years, the bank's total assets have more than tripled from about $430 billion to over $1.5 trillion, earnings per share have nearly doubled, and its footprint has grown from solely the western U.S. to a coast-to-coast operation.
And unlike most of its peers, Wells Fargo's 2013 earnings were actually higher than during the pre-financial crisis peak.
Much of this is due to Wells' ability and desire to cross-sell its services to clients – that is, to convince their customers to open multiple accounts, take out loans, and use the banks other products and services. Why is cross-selling so important, and how much more room for growth does Wells Fargo really have?
Why is cross-selling so important and effective?
Cross-selling is one of the most cost-effective ways for a bank to add to its deposit base, loan portfolio, and other businesses. According to a recent report by Fiserv, it costs banks 8-10 times more to gain a new customer than it does to sell a new product to an existing customer.
The more products each customer has with a bank, the longer the bank retains those customers. A customer who has a single product, like a checking account, with a bank stays for about a year and a half, but the average customer with three products will stay for nearly seven years. Customer retention is one of the keys to stability in banks, and cross-selling is the best way to do it.
Wells Fargo still has room for growth
Although they are universally recognized as the masters of cross-selling; Wells Fargo still has tremendous room to grow.
One area in particular with tremendous growth potential is the investment banking division, which was virtually non-existent until the Wachovia acquisition. Now that Wells has gotten a taste of the business, they want to be the market leader. As of now, only 7% of Wells Fargo's retail customers has some sort of brokerage account with the bank, leaving enormous potential for expansion. However, those customers who do have a brokerage account are some of the company's best customers, with an average of 10 banking products per customer.
There are several other big potential growth areas. Only 8% of the bank's customers buy their insurance through Wells Fargo, and only one in three have a credit card with the company. Wells Fargo has said that it wants every one of its creditworthy customers to have a credit card, and they have been aggressively marketing cards to their loyal customers.
Wells Fargo is the nation's leading mortgage lender, but it really hasn't fully capitalized on its potential yet. Only one in three of their mortgage customers also have a bank account with the company, and this should be relatively easy to change. It is already a very convenient option to pay your mortgage by transferring money from one of your Wells Fargo accounts to another, and if the company added an incentive (say, waiving account fees for mortgage clients), there is really a lot of potential to add to their deposit base here.
What it means to investors
Wells Fargo is the best cross-seller in the banking industry, and has been for some time. However, I believe the company is just getting started when it comes to cross-selling investment products and really capitalizing on their mortgage customers.
Just to add some numbers to the equation, let's say that over the next several years, Wells Fargo doubles its brokerage penetration to 14 in 100 of its retail clients. Well, the company currently earns about $3.5 billion in brokerage revenue and $475 million in net profit on a quarterly basis, and doubling their customer base should roughly double the revenues. Based on the company's results for 2013, an extra $475 million in profit per quarter would raise EPS by about $0.36, or by more than 9%.
And this is just one growth area. If the company succeeds in boosting their credit card accounts, retail accounts, mortgages, and insurance customers, Wells Fargo's ambitious cross-selling goals could mean big profits in investors' pockets.
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