Wells Fargo, viewed as a staid financial establishment for a considerable amount of time, has opened up a can of worms. At a time when the financial industry was wrapping up its legal battles caused by events that took place during the 2008 financial crisis, Wells Fargo announced on Sept. 8 that it will be paying fines totaling $190 million to several government agencies for opening unauthorized deposit accounts and credit cards.
While the $190 million fine for Wells Fargo is shocking, it is nothing but a drop in the bucket when compared to the total fines paid by the banking industry as a whole since the financial crisis—a stifling $250 billion.
The bank is usually insulated from bad press due to its distance from Wall Street, as the location of its headquarters is in South Dakota. So what went wrong at a bank that tried to set itself apart from the rest of the Wall Street crowd?
Wells Fargo set unrealistic sales targets. There are only so many savings accounts, checking accounts, credit cards and debit cards a person needs. The bank incentivized the employees to cross-sell the bank’s products to customers who did not need them.
The bank’s employees went ahead and opened roughly 1.5 million deposit accounts without the consent of their clients. The customers were then charged fines if their authorized accounts did not have sufficient funds to fund the newly opened accounts.
The bank’s employees opened some 565,000 credit cards for customers who did not request them. The credit cards created new charges, stratospherically high-interest rates and maintenance payments, all going to Wells Fargo as profit. In other words, there was a systematic identity theft and fraud being facilitated by the bank on its customers. Not all is gloomy, however, if one has been a victim of Wells Fargo’s despicable activities.
The Consumer Financial Protection Bureau order states that, “Wells Fargo must refund all affected consumers the sum of all monthly maintenance fees, nonsufficient fund fees, overdraft charges and other fees they paid because of the creation of the unauthorized accounts. These refunds are expected to total at least $2.5 million. Consumers are not required to take any action to get refunds to which they are entitled.”
So, in the wake of stringent financial regulations, how did the bank fail to discover a large scale fraud within its walls? It looks like the executives knew about the fraud all along. Wells Fargo CEO John Stumpf confirmed that the bank fired some 5,300 employees, including bankers, managers and their bosses, for unethical business practices. The executives must have been aware of what was going on. Unless the activities threatened to harm the bank, the executives must have let it slip through the cracks and prayed that they just would not get caught.
This is not the first time Wells Fargo has come into the crosshairs of regulators or has been subjected to huge fines. In 2012, the bank paid fines totaling $175 million for racial discrimination against African-Americans and Hispanics in a case relating to home foreclosures. In 2013, the bank paid $203 million in fines for overcharging its own checking account customers. In August, just less than three weeks before the current fiasco, the CFPB fined the bank $3.6 million for illegal student loan servicing practices. It appears that Wells Fargo has a rich history of ripping off its own customers on its list of accomplishments.
The bank is no longer the biggest bank by market value. It would come as no surprise if investor confidence in the company cratered. The CEO of Wells Fargo will be at a Senate Banking Committee hearing next week to address the bank’s alleged practices. The whole fiasco has put a big question mark on the effectiveness of consumer protection and financial regulation laws that are instilled in order to protect unsuspecting customers before it is too late. It should not come as a surprise when phrases like “too big to fail” and “too big to jail” surface once again.
With these occurrences, putting money under the mattress seems like a safer alternative than putting it into one of the largest banks in the country. Perhaps the only downside is that the 0.01 percent interest rate will not be added, but this interest rate is so minimal that it hardly makes a difference.