Scandals in the banking sector are not rare, but the newest scandal attracted much attention. The latest scandal with phony accounts has shown the pressure banks and bank employees are having in order to meet their sales goals. In addition, the Wells Fargo scandal is showing the vulnerability of bank clients and the ease with which they could be manipulated. Moreover, it should be noted that this scandal has raised many questions in relation to banks activities and customer trust. But, although we are all blaming Wells Fargo for the scandal, is the banks and its employees solely to be blamed. What do you think, is there anybody else who gave the opportunity for Wells Fargo employees to open the ghost accounts?
Wells Fargo fake accounts scandal
On 8th of September, Federal regulators reported that bank employees were opening unauthorized deposit and credit accounts, without the knowledge and consent from their clients. The scandal with fake accounts was executed by Wells Fargo Bank employees. The creation of these ghost accounts dated back to 2011. The most shocking thing is that more that 1.5 million of deposit accounts have been found to be phony. Also, more than 500,000 credit accounts have been opened without the consent of their owners (clients). According to the Consumer Financial Protection Bureau, employees have opened these accounts by transferring funds from clients existing accounts into the ghost accounts, without clients approval. The number of phony accounts created, is showing the magnitude of the scandal.
The motivation behind the ghost accounts
Everyone wants to know why the phony accounts have been opened. Well, the motivation for the employees could be found in the Wells Fargo internal procedures and politics. Namely, employees have had a sales goals set by the bank. On the basis of meeting these goals they could make more money. Thus, they have decided to boost their sales figures by earning unwarranted fees. Meaning that, among others, bank clients, were paying overdraft fees, or insufficient funds fees.
The managerial team should also be mentioned. Although, they are not directly responsible for the opening of the phony accounts. They do have a role in the motivations behind the scandal. Namely, the employees were not the only one that were earning more money because sales targets were met, managers also earned bonuses.
Consequences arising from Wells Fargo fake accounts scandal
Obvious consequence arising from the scandal is that Wells Fargo had fired 5,300 employees because of the scandal. This is along with the fine of $185 million with an additional obligation of $5 million to be refunded to its’ clients. But the reality is that the consequences have much bigger magnitude.
Namely, the consequences could be analyzed from the perspective of different parties that will lose something because of the scandal.
First and foremost are the customers – they are faced with financial loss, and even worse they are feeling manipulated by their bank. One of the institutions we should all trust the most.
Next, is the banking sector – this sector is highly sensitive to speculations and is one of the rare sectors that fears the domino effect. Although the scandal is far from causing a domino effect, it will cause a speculation. People are now asking whether employees from other banks did something similar in order to reach their sales goals. Now, the trustworthiness of banks is being questioned, clients might change their preference to do their business with banks. There is a risk that some portion of bank customers will start using the financial services on non-bank financial institutions. This, could increase the competition of banks even more, especially in an era when banks compete with large number of innovative FinTech companies.
Wells Fargo – will bear consequences in terms of decreased earnings and increased costs due to the fines and the obligation to refund its’ customers. Wells Fargo is one of the largest bank in USA. The scandal has cause negative effect first and foremost on its own employees (the one who didn’t participate in the scandal). Second, on its customers, because of the scandal, customers will question the bank each and every time they are using their services. Third, the value of Wells Fargo has decrease. Namely, Wells Fargo stock price has decreased by 15%. In addition, due to the fines and refunds, the bottom line would also decrease.
Investors will also feel the negative impact from the scandal – owning stocks in the banking sectors becomes questionable. There are even discussion whether investors should invest in banks, because bank related scandals are costing them a lot of money.
Should we put the entire blame on Wells Fargo?
In a situations like this when there are scandals associated with some banks, we urge to put the blame on the bank. But we should stop and think for a moment, is Wells Fargo the only side to be blamed. Some might disagree, but we should not put the blame solely on Wells Fargo. Yes, Wells Fargo is directly responsible for the phony accounts scandal, as one of the biggest banks, this should have never been allowed to happen.
But on the other side, this is showing the reluctance of bank clients, regarding their financial products. This should not be taken for granted that bank clients are responsible. But they do need to make occasional control of the financial products they are using. Although, we need to trust banks, we should not blindly believe in everything they are doing.
The scandal is a very good example regarding the client’s lack of information. After all, the scandal started unwrapping, after the reactions of some clients being charged fees for an accounts (products) they didn’t signed up for.
So, how come Wells Fargo employees managed to keep opening phony accounts since 2011, and only be noticed by couple of damaged customers? Just remember that they have opened around 2 million ghost accounts and have forged client’s signatures and personal information. This is imposing the need for some questions to be asked, in relation to customer’s behavior:
- How come customers are not aware what bank products they are using?
- Why customers have accepted to blindly pay different fees and charges, for products they didn’t even knew they have?
- Were Wells Fargo employees using customer’s lack of financial knowledge, or they have been using customer’s ignorance when it comes to bank products?
- Was it so hard for bank customers to check out the products they are using in their bank?
If we want to protect ourselves, as bank clients, from similar scandals in the future, we should try and answer many questions. Think for a moment, do you know which bank products you are using? Do you know what type and how many accounts do you have? Do you go through the monthly statements to see what are you being charged for by your bank? Do you understand the products you are using?
The lessons learned from Wells Fargo scandal
Each and every scandal is trying to teach us something. Whether we will learn or not depends entirely on us. The Wells Fargo scandal has taught us that we (as customers) should always be aware about the financial products we are using. It has also showed that we should pay attention to our monthly statements. We should look at the fees and charges, and see if we are charged for something we are not using. Thousands of customer were paying different fees and charges without noticing that they have not signed for the specific product. It would not cost us anything if we make an occasional check to see what we are being charged for.
Another lesson, is that banks should find another sales strategy. The sales incentive strategy obviously leads toward malpractice for the purpose of earning more money. It is understandable that banks are faced with fierce competition from other financial institutions. But nothing could justify the manipulation of customers. This struggle for clients and profits is increasing the pressure, but again, the sales incentives strategy is not viable any more. We are talking about 5,300 employees that were directly or indirectly related to the phony account scandal. It is hard to believe that they were working together. Which is even worse, because, different employees have come up with the same idea – opening fake accounts. They have all come up with the same idea for the purpose of making more money.
Moreover, the scandal has taught us that banks should strengthen their internal controls. It is outrages that the internal control mechanism have failed to detect that 2 million ghost accounts have been created since 2011.
In the future, pay more attention to your products, and pay a closer look at the things you are being charged for by the bank. Don’t become a victim just because you didn’t make an attempt to understand the products you are using. Always stay informed about your financial matters i.e. bank related matters. In case you are one of the customers who has been harmed by the Wells Fargo scandal, then you gather information about the steps you should take.