Car loan new seattle

Carol Ann Hackley

How Wells Fargo Bank Fargo set up housekeeping in Texas new home equity loan market

hOME EQUITY LOANS have become an important part of the bank consumer credit business, reaching new popularity with both customers and bankers at the end of the 20th century. But in Texas, laws dating from 1837 had prevented any borrowing against homestead property value, except for actual home improvement loans. After debating the issue for 25 years, the Texas legislature passed a home equity law in May 1997 that left the issue up to the vote of the electorate. The law was accompanied by red tape that lenders viewed as "draconian." Still, if the law passed in the general election, the potential home equity loan market in Texas could be as large as $10 billion in the first 24 months of the program.

Wells Fargo Bank N.A. decided to move into the lucrative market in the summer of 1997. With just five months until the election, the company had to learn as much about the market and the consumers as quickly as possible. Through the acquisi= tion of First Interstate Bank, Wells Fargo had increased its branches in Texas, especially in Dallas-Fort Worth, Houston and Austin. To move forward, it needed to build an infrastructure that would allow it to compete and be a market leader if the law passed.

Wells Fargo needed to move quicidy. In a matter of months, decisions had to be made in the areas of consumer research, assessing the place of Wells Fargo in the consumer mind a year after the merger, budgeting for the campaign, deciding the appropriate level of spending necessary to gain a top market share, designing advertising, working against the competition, lobbying public officials and positioning Wells Fargo as a home equity leader.

Consumer research focused on brand name recognition and awareness of home equity loans. Research revealed low awareness, uncertainty and fear of losing homes due to borrowing against them. Wells Fargo was seen as the bank that merged with First Interstate, but it had a favorable image associated with the values of the Old West. One advantage was that consumers were neutral toward First Interstate, so there was no usurper image to overcome. From its consumer research, Wells Fargo profiled the target customer as "a Texas homeowner who is looking to a trusted financial services provider for information about home equity loans, and who values excellent service and has demonstrated creditworthiness." It set out to create a DM strategy to persuade the customer to seek a home equity loan from Wells Fargo.

Wells Fargo decided to implement two direct mail components. The first, labeled "Stampede," was sent on Oct. 22, directly before the general election. On Nov. 20, if the law had passed, a second mail initiative, termed "Dust," was to be sent to non-customer homeowners in the Houston area. The goal was to profitably originate business through education on the new law, maintenance of strong customer focus and low cost/expeditious production. Because Wells Fargo only had a 6% share of deposits, it had to go outside the customer base with direct mail.

"Stampede" was a combination Wells Fargo Bank customer crossell and prospect extract mailing. The plan was to target nearly 142,000 homeowners for the new Texas home equity loan. The mailing base included 39,000 customers and 103,000 prospects. Because of the pending election, the mailing was a two-step pre-qualified drop. To build brand and educate customers before the election, the customer first received an offer for a "Consumer Guide to Home Equity Loans." If the law passed, the fulfillment stage would be enacted and the customer received a pre-qualified offer. Because the names had been pre-screened, all respondents to stage one received the pre-qualified offer.

"Dust" was a traditional prequalified mailing to non-customer prospects in the Houston area. Different letters were sent. The first solicited responses requesting the guide; the second accompanied the guide and invited recipients to call for more information. Another targeted pre-qualified homeowners and stressed both the low 7.99 APR and the after-tax translation of that rate to as low as 5.75%.

A telemarketing campaign was initiated once the law had passed on Nov. 4. Of the approximately 192,000 direct mail pieces mailed, Wells Fargo had telephone numbers for 150,000 for outbound follow-up.

Teaser 60-second TV spots stated, "If you have questions about home equity in Texas, Wells Fargo has the answers. Kids, college, car, vacations." A tag line was "For all your reasons why." The pre-election teaser ads also offered a free guide to home equity loans.

The marketing strategy for the home equity loan mailings was to develop an understanding of mailing home equity loan offers to Texas; gain early market share; test telemarketing for servicing prospects and explore early closing strategy through outbound telemarketing; and build an understanding of response behavior.

By Oct. 20 the phones were ringing. Although home equity loans could not be finalized until mid-January, some 4,000 applications had been submitted by Jan. 1, 1998. In 10 weeks, Wells Fargo had 20,000 calls concerning home equity loans. Unfortunately, the quality of the applications was not as high as anticipated. Once approval could be given, the rate of completion was only 35%.

For the Texas campaign, the goals were twofold: volume of loans granted and market share. Although the market share targets were met initially--Wells Fargo attained an initial No. 1 or No. 2 share--only 50% to 60% of the intended dollar/volume goal was achieved. Further, the market was softer than anticipated; acceptance of the home equity packages was lower than projected. The direct mail campaign was not as successful as it had been in driving customers into branch banks to finalize the loans. Just when Wells Fargo adjusted its ad campaign expenditures and exposures downward, other banks in the market became more competitive in the business and began advertising rates of .25 to .50 lower. The public perception was that Wells Fargo charged too much. Eventually, Wells Fargo dropped to third or fourth in market share. But although the volume of loans fell off, the approval rate for loans rose as the market matured.

This was a situation in which decisions about start-up plans and costs, advertising spending levels and the anticipated demand curve needed to be made before Wells Fargo even knew whether the product was going to be marketable. To be competitive in this lucrative market, Wells Fargo needed to move immediately after the May legislative decisions and to invest heavily, well in advance of the November referendum election. Although projections as to total market viability could be made using experience from other states, from population/home ownership figures and bank deposit levels, no firm data on demand existed for Texas. Other factors contributed to the failure to meet volume goals:

* Start-up costs to establish the working infrastructure were high. In June, Wells Fargo had one person on the Texas home equity account. In the next four months, over $1 million had been spent on research, advertising, call center development and hiring and training 700 people.

* With the necessary heavy expenditures for the aggressive campaign, the cost for each loan application was about $200.

* Research showed Wells Fargo had little brand awareness, which had to be overcome through broadcast advertising and direct mail.

* Many initial applications did not meet the minimum income or equity standards set by the bank.

* Competing banks entered the market aggressively, once the referendum had passed, with loan rates fractionally lower than Wells Fargo. This led to a public perception of Wells Fargo being expensive.

Valuable lessons were learned in the Texas campaign. The aggressive advertising did pre-empt the competition in the beginning. And the components that worked were introduced into other Wells Fargo markets, including Seattle, Phoenix and Denver, and in all nine states in the Wells Fargo region outside California.

Mary Alice Shaver is a professor at Michigan State University; Carol Ann Hackley is a professor at University of the Pacific. This study was written for the DePaul University Institute of Interactive and Direct Marketing's Case Writer's Workshop.