Meet Wells Fargo (NYSE:WFC), the No. 1 bank in auto lending, small business, and mortgages -- the banking sector's smart kid in class. And while the smart kid in class is normally remembered for ruining the curve on tests, they often have one huge weakness. For Wells Fargo, that weakness is credit cards -- aka, the gym class of banking products.
At a recent financial services conference, Wells Fargo CEO Jon Stumpf stated, "Of those customers who call us their bank [...] only 36% carry our card." That means just 25 million of the bank's 70 million customers are currently using a Wells Fargo credit card.
Unlike the nerd of the class, though, Wells Fargo doesn't plan on just standing in the corner and praying not to get smoked in the face with a dodge ball. Stumpf, instead, is rallying the troops, saying, "I am not going to be satisfied until every creditworthy customer who calls us their bank carries our credit card."
The real question for Wells Fargo moving forward isn't whether there's huge opportunity here -- according the Fool contributor John Maxfield, a stronger credit card division could mean up to $50 billion in additional assets -- the question is how will Wells Fargo attack the credit card market? And just how successful will it be in 2014?
Why don't more customers use a Wells Fargo credit card?
It's easy to forget, but at one point, Wachovia was one of the four largest banks in the United States. According to an article in The New York Times, however, the bank had agreed to a card-issuing partnership with MBNA in 2000. This partnership essentially handed over Wachovia's credit card business to the more card-focused MBNA. The partnership lasted until 2006, when MBNA was acquired by Bank of America.
Wells Fargo would acquire Wachovia in 2008, which gave the less-than credit card savvy bank just two years to create new business. For that reason, the Wachovia acquisition drastically skewed Wells Fargo's numbers.
According to Stumpf, "We have gone from two years ago in 25%, 26% penetration, last year it was 32%, now it's 36%." That kind of growth in penetration in two years is a good sign for investors that Wells Fargo has the capability to follow through with growing the business.
A customer-focused bank
Wells Fargo, compared to other big banks, seems to have done the best job selling itself as the most customer-focused. However, according to the most recent J.D. Power & Associates customer satisfaction study on retail banking, even though Wells Fargo scored better than rival big banks Citigroup and Bank of America, Wells Fargo is merely middle of the road.
Even when comparing primary mortgage origination satisfaction -- which is Wells Fargo's bread and butter -- Wells Fargo is again just middle of the road. Wells Fargo also received average scores for credit card satisfaction.
If Wells Fargo really wants to step up to the plate and earn its customers' credit card business, I think it's going to need to do more than be average, and that means getting some help.
Call in the ringer
Wells Fargo must have read the writing on the wall, because this past August, the bank announced a partnership to begin issuing American Express (NYSE:AXP) cards -- which is the top-ranked card in customer satisfaction.
American Express has made a name for itself by attracting affluent customers through its fantastic rewards programs. And up until recently, American Express operated strictly on a closed-loop system -- which means the company both issued cards and acquired merchants.
While that strategy has worked really well for American Express in the past, the company seems to be interested in expanding its network at a much faster rate, and for that reason, the company has formed several card-issuing partnerships connected with the American Express network.
American Express mentioned in its press release that there would be test runs for the Wells Fargo American Express cards in late 2013 into early 2014, and then a full roll-out of the cards in mid-2014.
The partnership looks like a win-win: Wells Fargo gets to give its credit card division a much needed face lift, while American Express can leverage the relationship to expand its business.
Does this make Wells Fargo a buy?
Wells Fargo is a strong and sustainable business, and if the bank is able to continue to grow its credit card division, it'll be yet another feather in its cap and another great reason to buy.
The problem is, with a number of big banks trading at or near tangible book value, Wells Fargo looks a little expensive by comparison. If anything, I think Wells Fargo's interest in growing its card division should make American Express look very appealing.