World Bank Access to Finance Conference

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World Bank Access to Finance Conference May 31,
2006
Wells Fargos Model for Financial Outreach
Bing Xiao, Senior Vice PresidentWells Fargo Bank
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About Wells Fargo

• Founded 1852
• 5th largest bank in the U.S.
• Only U.S. bank rated AAA by Moodys
• Bank operates primarily in 23 Western and
  Midwestern states
• Strategic focus on customer cross-sell
• 20 year compound stockholder annual return of 21
  -- versus the SP 500 of 12

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Wells Fargo Small Business Lending

• Prior to 1990, Wells Fargo was not a significant
  small business lender.
• Focus on small business started in early 1990s.
• Began direct lending in 1995 - streamlined loans
  of up to 100,000 largely to firms with less than
  2 million in sales.
• By 2004 Wells Fargo was 1 for the third year in
  a row in loans under 100,000 to small businesses
  in the U.S., with 15 market share nationally.
• In the past 10 years, Wells Fargo loaned more
  that 26 billion to small businesses owned by
  African-Americans, Asian-Americans, Latinos and
  women.

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Reaching Out to Small Businesses

• Opportunities
• Small loans to small businesses is a big and
  growing business
• In the U.S., small businesses represent over 40
  of the GDP, employ more than half the private
  workforce, and create three of every four new
  jobs.
• Loans under 100,000 and business credit card
  volume have both grown at double digit rates in
  recent years.
• Traditionally an under-served market
• Significant cross-sale opportunities
• Challenges
• High degree of complexity
• Lack of reliable information
• High perceived risks

High transaction costs and low profitability
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Tax Returns, Financial Statements Required
Application Reviewed in Detail by Lender
Annual Review Required
Collateral often Required
Booked on Commercial Loan System
Focus on Very Low Losses
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Adverse and Positive Selection

• Making good, solid borrowers want to apply and
  use credit is critically important to credit
  quality and to portfolio profitability.
• Examples of Adverse Selection
• Long and involved application
• Uninteresting offer very small credit limit,
  very high interest rates or fees
• Internet
• Carefully designed processes, such as simple loan
  application, can achieve two important objectives
  at the same time lower losses by reducing
  adverse selection and increase product
  attractiveness.
• In small businesses, owners are the primary
  financial decision-makers. Business Direct
  greatly reduces owners transaction costs.
  Saving time and keeping it
  simple are very important to them.

Marketing New Product Development
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Marketing Test and Product Innovation

• Constant testing, measuring, and learning is key
  to effective small business marketing.
• List sources
• Product offers
• Direct mail creative
• Telemarketing scripts
• Channels branch, direct mail, telemarketing,
  internet, partnership
• Disciplined analysis of test results required to
  succeed - What kind of customers are we
  attracting? Whats working? Whats not working?
• Continue to explore new ways to better serve
  small businesses.
• Ask why not? - challenge conventional thinking
  in our industry.
• Small experiments accelerate learning and obtain
  quick customer feedback.
• Nurture entrepreneurial talent and encourage
  initiative ownership we established a separate
  group five years ago to manage new initiatives.

Marketing New Product Development
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The Business Direct Loan Decisioning Process
Underwriting Credit Scoring
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Business Direct Today A Profitable and Growing
Lender That Helps Small Businesses Succeed
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Creating a Winning Small Business Lending
Organization and a Culture for Success

• Organizational and strategic focus on small
  business lending a separate line organization
  supported by top management.
• Create a conservative risk culture and at the
  same time encourage prudent risk-taking.
• Disciplined monitoring and analysis to catch
  poorly performing groups early.
• Focus on building and improving key capabilities
• Data, more data, and data analysis.
• Emphasis on excellent execution.
• Innovation is valued and rewarded.
• Attract and reward top talent. It can really make
  a difference!

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Can the Lessons Be Applied Somewhere Else?
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Thank You Questions?