“You’ve done something I’ve never seen in 10 years: you have united this committee — and not in a good way” – Senator Jon Tester to John Stumpf
On September 22nd, John Stumpf, the CEO of Wells Fargo testified to the US Senate Banking Committee. He was answering for the recent scandal, which involved the fraudulent creation of 1.5 million chequing and savings accounts. The scandal also included the creation of half-a-million credit cards – all created without the consent of the customers. Numerous customers consequently faced unexpected annual fees for accounts and cards they didn’t even know they had. Not only that, non-payments of relevant fees negatively affected customers’ credit scores. This kind of irresponsibility was enough to incur the wrath of U.S. Senators across the aisle.
Back in 2008, during the middle of the financial crisis, Wells Fargo was touted as one of the best performing banks, keeping its balance sheet in order during a very troubling time. Today, however, it has swiftly fallen from grace in the eyes of lawmakers, investors and – most importantly – customers. Furthermore, the scandal has resulted in extensive Congressional questioning regarding accountability, corporate culture and the business strategies implemented by Wells Fargo.
Wells Fargo’s Rise and Fall: Cross-Selling as a Strategy
Cross-selling is the practice of selling different products to the same customer. A common example is in fast food shops, where, after buying a burger, the server may ask you if you want a beverage with your order. An example in the banking sector would be opening a new chequing account, and then being encouraged to open a credit card account on top of that. The benefits of cross-selling are significant; having multiple accounts within one bank greatly increases convenience for both the customers and the banks.
On average, banks make very little money from hosting chequing and savings accounts. According to Mike Moebs, a former Wells Fargo executive, these low value chequing accounts only bring in around $41 per account. If a bank could sell additional financial products to customers with an existing chequing or savings account – say, for example, a mortgage –, that would bring in at least few hundred dollars a month: a significant increase from a measly $41. Pushing for constant cross-selling of its banking products, or “solutions” as they were called, was what Wells Fargo did best. However, in order to meet this ever-increasing need to cross-sell more solutions for company growth, senior executives set increasingly unreasonable sales targets: employees were expected to ensure that customers were being sold on average 8 solutions up from an already impressive 6.
Some may argue that Wells Fargo has already paid for its crimes: it was fined $185 million dollars, its stock market value has dropped by 9%, and it has planned to reimburse affected customers. However, it is difficult to adequately measure the wide variety of costs incurred by customers from unexpected bills and compromised credit scores. Even if Mr. Stumpf takes full personal responsibility, and is forced to step down, it may still not be enough. In truth, neither reimbursement nor retribution can rectify the situation.
Instead, the attention regarding Wells Fargo ought to shift towards prevention: how do we make sure such scandals do not happen again?
Creating an Ethical Workplace?
In his statement to Congress, Mr Stumpf stated that the bank regularly reminds employees to meet high ethical standards, and argued that the rest of the bank should not be judged by the actions of a mere “1% of employees.” Assuming this is true (notwithstanding claims that employees who called the ethics hotline were fired), this raises a more complicated question: what encourages employees to take part in fraudulent activities given that the consequences of being caught are so high, and the rewards are low?
Julia Miller, a former manager at Wells Fargo, reacted angrily when she heard Mr. Stumpf’s statements implying that low-level employees who took part in the scandal had no regards for ethical standards. According to Miller, lower-level employees were forced to take part in such fraudulent activities in order to keep their jobs. Wells Fargo’s senior executives may not have explicitly directed the lower-level employees to cheat – but they didn’t need to. The unreasonable sales targets set by management, according to Miller, was enough for employees to take part in the scam, or risk losing their jobs.
Perhaps most troubling, however, is that when ethical breaches were being reported, they went completely ignored. For instance, Rasheeda Kamar, a former branch manager from New Jersey, repeatedly tried to tell senior managers about fraudulent activities that were going on in other branches – to no avail.
The options open to these low-level employees played out like a prisoner’s dilemma. Given that some employees were committing fraud, other employees would appear to be under-performing (and risk getting fired) unless they also engaged in fraudulent activities themselves. Moreover, since fraudulent behaviour was not punished – and in fact, rewarded –, employees were better off committing fraud regardless of what others were doing. Compounded with the inter-employee and inter-branch competition, Wells Fargo’s misdeeds attracted the attention of the authorities.
Maybe it’s the Culture
All this evidence might imply a fundamental issue of corporate culture within Wells Fargo. As was reported in the New York Times last year, Amazon’s cutthroat work environment where the worst performing employees would be laid off on an annual basis led to a toxic work climate, where employees would deliberately sabotage each other in order to avoid being among the worst performing employees of that year.
The question of the cutthroat environment hovers over the Wells Fargo scandal. Observers are left wondering what role, if any, such ruthlessness in the workplace had in precipitating the Wells Fargo scandal. It’s an open secret that large banks like Wells Fargo have what is dubbed a “Wall Street culture” – a culture stereotyped as overly ambitious, opportunistic and exploitative. On the surface, one may conclude that it’s the employees themselves primarily at fault: they are the ones who created numerous fraudulent banking products after all. Yet, this narrative would only make sense if the employees could actually make personal gains from such behavior; the rewards are far too low for personal gain to be the critical factor. Moreover, these were low-level employees who likely had little bargaining power due to how replaceable they were. Not only that, given the incentive scheme in place at the Wells Fargo retail divisions, it’s more likely that Wells Fargo employees cheated out of necessity in order to retain their jobs.
Going Forward: Will the Stench Remain?
It is yet to be determined how much this scandal will cost Wells Fargo. The immediate consequence has been a tarnished reputation. Suspicious customers are likely to move their accounts to Wells Fargo’s rivals. There is also a $2.6 billion class action lawsuit that has already been filed by employees who chose not to engage in fraud and were subsequently demoted for missing sales targets. For now, Wells Fargo has stopped setting explicit sales targets – an action which many see as too little too late.
If Mr. Stumpf thought Senator Warren’s questioning was merciless, he may be in for an unpleasant surprise: with the upcoming class-action lawsuit, and the continuous PR debacle, the worst has yet to come.