Today is about Wells Fargo’s exit from the consumer credit business. Although headlines in the US make the strategic move sound like Americans are missing out on the age-old installment loan process, it looks like members of the fourth estate didn’t take a moment to review Wells’ regulatory reporting. Bank – personal installment loans are not in great demand at either Wells or any of the other top banks.
The Motley Fool yells that “some Wells Fargo customers may see a drop in credit scores due to account closures,” but only deep in history do you find the line utilization indication that unused credit lines add to your valued FICO -Score can contribute. FICO scores are predictive and risky. So don’t expect a radical change.
Yahoo News announces, “Wells Fargo is giving up personal loan business,” and they draw an ugly view in the first paragraph of the story when they say, “After seeing a flaw of its kind, it decided to close accounts that were theirs Customers want. “
Here is the reality. Lending is a consumer service business and consumers make decisions. The credit model calibrates pricing based on risk and demand. It uses interest rate spreads to generate income and costs reduce noninterest income, including credit risk and operating costs.
Wells had previously announced the suspension or limitation of home equity credit lines (HELOC) in April 2020. As reported by the WSJ, so did Bank of America, Chase, and Citi. These strategies hardly made the news, however, as COVID was on the mind of every news writer.
Now consider the Wells Fargo 1Q2021 financial data. Reported revenue for the first quarter of 2021 was $ 18.1 billion, of which $ 8.8 was from the net interest income channel and $ 9.3 from noninterest income. The consumer bank’s net sales were $ 8.654 billion from five sources, as shown below.
Note the personal credit line, which was only $ 128 million in sales. This equates to just 2.8% of the bank’s consumer revenue and, on the whole, Wells total revenue only 0.7072% of total revenue.
The product is not in great demand. If you do the same exercise with other top banks, you will see similar sales trends; Installment loans don’t take up much of the major banks’ lending strategies. If you’ve read Mercator’s recent “Buy Now, Pay Later” lending report, it states that banks do not dominate the installment lending arena; Fintechs do.
Perhaps today’s stories should have a different note than the aforementioned gloom and doom. I would use something like “Wells Re-Aligns Lending Strategies” or maybe follow the WSJ with “Borrowing is Back as Sign-Ups for Auto Loans, Credit Cards Hit Records”.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group