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World Bank Access to Finance Conference

May 31, 2006

World Bank Access to Finance Conference

May 31, 2006

Wells Fargo’s Model for Financial Outreach

Bing Xiao, Senior Vice PresidentWells Fargo Bank

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About Wells FargoAbout Wells Fargo

• Founded 1852

• 5th largest bank in the U.S.

• Only U.S. bank rated AAA by Moody’s

• 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 S&P 500 of 12%

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Wells Fargo Small Business LendingWells Fargo Small Business Lending

• Prior to 1990, Wells Fargo was not a significant small business lender.

• Focus on small business started in early 1990’s.

• 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 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

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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

No Tax Return or Financials Needed

Most Decisions Made Automatically Based on Scorecard

No Review – Line is “Evergreen”

Unsecured

Booked on Consumer Loan System

Higher Losses Acceptable with Risk-Based Pricing

Applications by Mail, Phone, or Branch

New Process

Application in Branch or with Loan Officer

Traditional Process

Dramatic Changes Have Made Small Business Lending Highly ProfitableDramatic Changes Have Made Small Business Lending Highly Profitable

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Underwriting &

Credit ScoringMarketing & New

Product DevelopmentAccount & Portfolio

Management

• Attract low risk small business borrowers

– Data-driven targeted marketing

– Attractive offers– Constant testing

• Develop new and innovative products and services

– Think out of the box– Cross-sale– Achieve higher growth

rate and maintain the leadership position

• Use consumer credit techniques and develop small business specific rules and models

– Leverage information between businesses and their owners

– More complex data and segmentation

• Constantly analyze, evaluate, and modify existing u/w policies and models

• Conduct on-going assessment of the risk of each account

– Take action if needed• Analyze and monitor

performance by customer segments

• Maximize profitability at the total portfolio level

– Create a balanced portfolio with diversified risks

Building a Lending Operation Focused on Small BusinessesBuilding a Lending Operation Focused on Small Businesses

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Adverse and Positive SelectionAdverse and Positive Selection

Marketing & NewProduct Development

• 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.

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Marketing Test and Product InnovationMarketing 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? What’s working? What’s 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 & NewProduct Development

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The Business Direct Loan Decisioning ProcessThe Business Direct Loan Decisioning Process

TargetingWe target offers to long-

established small businesses with good

trade credit

Business Loan Applications

Data Input Integrity ControlsInput errors can cause decision errors

Verification and Pre-ScreeningFinds inconsistent/possibly fraudulent

applications

Statistical ScorecardOne or more statistical models rank applicant risk

Out-sorted for Lender ReviewRules identify applications requiring a lender

review

Setting Price and Credit AmountPrice and loan size set according to relative risk

Underwriting &

Credit Scoring

• Millions of applications processed.

• 2/3rd of decisions made automatically, 1/3rd reviewed by lenders.

• Our processing cost of small business loans is among the lowest in the industry.

Key Facts

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Business Direct Today – A Profitable and Growing Lender That Helps Small Businesses SucceedBusiness Direct Today – A Profitable and Growing Lender That Helps Small Businesses Succeed

Underwriting &

Credit ScoringMarketing & New

Product DevelopmentAccount & Portfolio

Management

• 450,000 customers in 50 states and Canada

• Median sales: $ 325,000

• 70% have 5 or fewer employees

• Average line/loan balance: $ 15,000

• Median business deposits: $ 7,000

• Average time in business: 13 years

• Average time as Business Direct customer: 6 years

• $ 20 Billion in loan commitments• $ 8 Billion in loans outstanding -

91% unsecured

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Annual Profit

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

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Creating a Winning Small Business Lending Organization and a Culture for SuccessCreating 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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RESOUCE

• Capital investment (Smart capital)

• Organizational alignment and support

Can the Lessons Be Applied Somewhere Else? Can the Lessons Be Applied Somewhere Else?

A SUCCESSFUL SMALL BUSINESS LENDING BUSINESS

INFRASTRUCTURE• Stable & balanced legal and political environment (e.g.,

property right, contract/collection laws, etc. )• Healthy and active small business segment

• Sound payment & banking system (e.g. , interest rate flexibility for risk-based pricing)

• Reliable communication and postal systems

INFORMATION

• Good consumer bureaus (positive & negative)

• Available business information sources

• Robust customer information system

PEOPLE

• A skilled, talented and committed internal team.

• A culture of learning, innovation and calculated risk-taking.

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Thank You

Questions?

Thank You

Questions?