How Wells Fargo Became One of America's Biggest Banks

Wells Fargo (WFC) is among the top five banks in the United States, ranking in the fourth spot as of September 2022 right after JPMorgan Chase, Bank of America, and Citibank. According to the company, it had more than $1.94 trillion in assets as of the end of 2021.

The bank serves more than 64 million customers across the country and has more than 250,000 employees. The bank had a market capitalization of $158.97 billion as of January 2023. Wells Fargo reported net income of $21.5 billion earnings for the 2021 fiscal year.

Banking is the ultimate intangible industry, moving assets from lower-valued to higher-valued uses in the most impalpable of ways. But that still leaves plenty that distinguishes Wells Fargo from its major U.S. competitors starting with its size and its reach.

So how does the bank make money? One way is by lending out money at a higher rate than it borrows. But there's more to it than just earning money in interest. This article looks at how Wells Fargo earned its spot among the other big banks in the country.

Big, Regional Acquisitions

Wells Fargo was created with the merger of large super-regional banks. Founders Wells and Fargo created their namesake in 1852 to cater to the growing population of gold miners and related hangers-on in California, which was in the early stages of its transition from a distant backwater to the most populous and economically powerful state in the union.

After close to a century and a half of steady growth, Wells Fargo merged with Norwest Corp. in 1998. A decade later, Wells Fargo bought out East Coast giant Wachovia. Add them all together, and Wells Fargo can now claim over 64 million customers from coast to coast. 

Wells Fargo officially divides its operations into three categories for management reporting purposes: Investing and wealth management, wholesale banking, and community banking.

Investing and Wealth Management

This segment services business clients and high-net-worth individuals (HNWIs) by offering them wealth management services, as well as investment and retirement products. Some of these services include financial planning, credit, and private banking.

Wells Fargo's investment services division allows clients to choose automated self-directed trading and investing or a full-service financial advisor. The wealth management division provides team-based management solutions or a one-on-one approach with a dedicated financial professional.

Wholesale Banking

Wells Fargo's wholesale banking division tends to the financial needs of U.S.-based and global businesses. There are 13 different business lines that fall under this category including:

• Business banking
• Corporate banking
• Commercial real estate
• Insurance
• Credit risk

Community Banking

This part of the bank's operations services retail and small business clients with their everyday banking needs. Some of the services include checking and savings accounts, loans, and mortgages. Wells Fargo also provides its retail clients with small investment services, including certificates of deposit (CDs). The bank serves these clients in its branches, through its automated teller machines (ATMs), and through its online banking platform.

Serving the Rich and the Mass Market

Investing and wealth management means financial services for rich people. This division reported $2.2 trillion in assets in 2021. That sounds substantial, but it’s the least lucrative of the bank’s three areas of operations. Keep in mind, though, that net income in Q3-2022 came in at $639 million.

This end of Wells Fargo’s business doesn't just dispense advice, it also helps in other ways such as setting up foundations or solving inheritance issues before they arise. Everyone with a high net worth (at least in the United States) knows that preserving one’s affluence can be almost as much work as it was to get wealthy in the first place.

The word wholesale has a slightly different meaning in banking than it does elsewhere. Plenty of banks don’t even use the term. But at Wells Fargo, it’s a catch-all for underwriting and selling asset-backed securities along with other types of banking for large corporations and even other banks. 

Not Just Retail Banking

This doesn't even begin to cover it. For instance, wholesale banking includes equipment financing. So if you want to buy a dragline for your surface mining project but don’t have the $35 million or so on hand to pay for it with cash, Wells Fargo can front you the money.

Wells Fargo also handles crop insurance, commercial real estate, energy-syndicated loans, and more. Many Fortune 500 companies do some wholesale banking with Wells Fargo. That’s when they’re not transferring their risk. 

When a multinational with tens of millions of dollars in cash on its balance sheet needs somewhere to store that cash, Wells Fargo's wholesale division is where they do business. To be a Wells Fargo wholesale customer, you need annual revenues of at least $5 million.

Wells Fargo’s wholesale operations have an even greater reach than its community operations. The bank has wholesale offices in 42 states that are manned by more than 30,000 employees. That’s to say nothing of its wholesale offices across the globe, from Santiago to Seoul, Calgary to Cairo, and Sydney to St. Helier. Net income from the wholesale banking division amounted to $2.77 billion for the third quarter of 2022—far more than wealth, brokerage, and retirement operations.

Community Banking, Above All

Now let's look at the community banking section. Net income for this division was $1.2 billion on total revenue of $19.5 billion at the end of the third quarter of 2022.

This margin might seem high, but it really isn’t. If you’ve ever been skeptical of how you can possibly be so big a profit center to a bank, what with your modest checking account balance and your restrained use of your debit card, understand that community banking is more than just ordinary people depositing their paychecks and maybe buying the occasional mortgage.

According to the company, the community banking segment includes a wealth of services, including checking and savings accounts, credit cards, loans, mortgages, home equity, and small business.

Scandals 

The Federal Reserve imposed a cap on Wells Fargo's assets worth more than $1.95 trillion due to its "widespread consumer abuses." The cap caused the bank to lose hundreds of billions of dollars in stock market value. Wonder why? Here's a long, but not exhaustive, list of the company's scandals.

Wells Fargo CEO Tim Sloan, who spent 31 years at the company and was trying to restore trust in the brand, stepped down unexpectedly in March 2019. "It has become apparent to me that our ability to successfully move Wells Fargo forward from here will benefit from a new CEO and fresh perspectives," he wrote in a statement. Sloan faced pressure to resign from regulators and critics who saw him as too much of an insider to reform the bank's culture.

Fake Accounts

In December 2013, the L.A. Times reported that desperate branch employees opened fake accounts and credit cards in order to meet their sales quotas. At the time of the story, the bank denied all the claims. It was only three years later in 2016 that the company admitted that over 3.5 million unwanted accounts were opened.

Here's why. In order to get bonuses, Wells Fargo employees needed to hit huge sales goals that many felt were unrealistic. Instead of finding real customers, employees just created accounts for existing Wells Fargo customers unbeknownst to them. The employees even used fake email accounts and personal identification numbers (PINs) to sign them up, seemingly hoping no one would notice. Small amounts of money were even transferred to these accounts to make them look real.

Wells Fargo promised to refund customers who had improper fees as a result of this business practice and fired 5,300 employees. Even the bank's chief executive officer (CEO) stepped down. According to the New York Times, Wells Fargo paid "more than $1.5 billion in penalties to federal and state authorities and $620 million to resolve lawsuits from customers and shareholders." 

Lending Scandals

Wells Fargo has been the subject of a series of lending scandals, including:

• The mistreatment of its auto loans and mortgage consumers. In April 2018, the Consumer Financial Protection Bureau (CFPB) and the Office of the Comptroller of the Currency fined Wells Fargo $1 billion after the scandal came to light.
• The Securities and Exchange Commission. (SEC) found in June 2018 that Wells Fargo supported active trading by brokerage clients on high-fee debt products that were supposed to be held to maturity. Without admitting or denying guilt, the bank settled and repaid $1.1 million in ill-gotten gains and interest as well as $4 million in penalty.
• The company paid a penalty of $2 billion in August 2018 for allegedly misrepresenting the quality of residential mortgage loans a decade earlier.
• The CFPB fined the bank another $1.7 billion in December 2022 for unfair practices relating to consumer loans. According to the release, the bank not only misapplied its customers' loan payments but also charged the wrong amount in fees and interest. The CFPB also found that the bank mistakingly went through with repossessions, among other actions.