Friday, September 09, 2016

Wells Fargo's account opening debacle

The fiasco around Wells Fargo's disclosure that it has been fined for setting up bank accounts and credit card accounts without the knowledge of customers will not be a significant financial event for the firm.  Wells can easily digest the fines, as they pall in comparison to all of the fines over recent years related to mortgage securities and mortgage originations in the industry.  In addition, the cost to the bank of reimbursing customers for actual overcharges or late payments is modest.  That said, the reputation risk for Wells is huge.

Investors closely follow account growth, and the success of the overly vaunted concept of "cross selling".  In forecasting future earnings growth, they consider the potential benefit from new accounts.  Their forecasts are now tainted.  Customers, too, will certainly be aghast now that they know that this has been surreptitious practice of some Wells' bankers.  Most importantly, however, is the complete waste of time and the aggravation that this fraud has caused existing customers that have been affected.  Can a reader fully appreciate how much time it takes and aggravation it causes to deal with a problem that one has with a bank account.  People in general are understandably highly sensitive about irregularities in their financial life, and losing sleep over it is normal.

Wells says that it has fired 5,300 employees that have been involved in the scam.  Bizarrely that has been over a five year period.  They have long known that they had a problem.  The incentive system at the bank, closely linked to "cross selling", has somehow incented this behavior and yet has apparently not been modified during this time frame.  Selling commodity products is possible only with strong relationships.  Broad online banking opportunities from multiple sources have dented those relationships.  That's the dilemma for retail bankers, especially those who are just beginning at a firm and need to build a portfolio of clients.

There are questions that arise from this.  First and foremost is whether this is an industry problem and not solely related to Wells?  Second is whether, with all of the mergers that have created our major banks, is this behavior primarily related to one or two regional areas tied to acquisitions by Wells or is it widespread?  Third, what changes will Wells make to avoid a repetition of this, as firing of those involved over the years does not seem to have been effective?

The banking industry certainly did not need another reason for the politicians to pounce on it, but this will surely be campaign fodder.


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