The Closing of Credit Lines
Wells Fargo (NYSE: WFC) is a financial services corporation that offers banking and loan products to its customers.
These credit lines were used to let users borrow $3,000 to $100,000. It was presented as a way for individuals to make payments that can be tapped into at any time.
This was directed from their CEO, Charles Scharf, who also did not state whether these credit lines were impacted by the Fed asset cap which is currently restricting Wells Fargo.
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A 60-day notice was issued to their customers that their accounts will be restricted, any remaining balances will require minimum payments at a fixed rate over time. This is a rather odd situation because it was previously thought the banking industry was trying to boost loan growth.
Wells Fargo reported their second-quarter with revenue jumping 11% year-over-year to $20.3 billion which beat Wall Streets’ expectations despite the lower demand for loans. They also posted earnings per share of $1.38 versus analysts’ estimates of $0.98 which was a pleasant surprise for many.
Wells Fargo benefited greatly from a rapidly recovering economy and growing markets worldwide. Low interest rates have created a headwind for them, potentially limiting the growth back into their business.
Although, they have begun cutting back on expenses by laying off employees and closing branches to make room for profits. This was a plan initiated earlier this year when Wells Fargo stated they would cut $8 billion from annual operating expenses.
It will be interesting to see if Wells Fargo can climb back to their previous revenues in full-year 2019 of over $82 billion, or maybe higher as time progresses.
What May Happen Next
Cutting credit lines may improve and simplify their product offerings, although it did still surprise many. By doing so, they believe they can better service other products more efficiently to their customers such as credit card and personal loan products.
While cutting back expenses through laying off employees and closing branches works effectively in the short term, it’s a sign that the cracks are forming in Well Fargo’s business model because it’s simply not sustainable. There need to be other avenues to generate profitability.
The primary competitors to traditional banks such as Wells Fargo are digital payment or banking companies such as PayPal, SoFi, Square, and others. They can provide faster and more efficient services to customers, potentially converting those previous customers using Wells Fargo credit lines into their own.
The primary advantage of non-physical digital banks is because expansion requires a server room to power the operations, a handful of employees, and of course a compelling product line. It’s much more convenient to bank and solve problems on your phone, rather than at a physical location.
The cutting of personal credit lines shocked millions of people. While the reason for doing so seemed bleak, it may be justified over time if Wells Fargo delivers the promise of offering simple and more efficient services.
Their recent quarter showed steady signs of growth in their revenue and profit segments, but seeing them let go of employees and close branches is worrying to some, to say the least. This is a sign that there may be major disruption on the horizon which traditional physical bank branch locations will need to prepare for.
If Wells Fargo can deliver consistent earnings and revenue growth while maintaining its strong grip on many customers in the United States, then it could easily transition to more sustainable business models in the future. Only time will tell.
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