The term 'Wells Fargo Scandal' is included in the Banking edition of the Financial Dictionary. Get your copy on Amazon in Kindle, Paperback or Audio edition. Check for lowest price here...
The Wells Fargo scandal began because of a high pressure corporate environment where its employees were expected to meet ambitious sales quotas or face demotions or job loss. Over the course of five years, the bank employees opened upwards of two million unauthorized accounts without consulting with their customers. These fraudulent new accounts ran the gamut from checking, to savings, to lines of credit and credit cards.
This Wells Fargo scandal caused the bank to receive a $185 million fine in September of 2016 for these actions. For a bank of its size with a trillion dollar plus balance sheet, this amounted to a mere slap on the wrist. More threatening to the bank are class action lawsuits. One of these filed in California seeks at least two billion dollars in damages for employees who were fired or demoted for not meeting their sales quotas. This award would be dispersed to those former and current employees who refused to participate in these shady activities.
Until this Wells Fargo scandal erupted, the branch and phone center staff at the bank worked under the constant pressure and threat of highly ambitious sales quotas. The bank’s executives used to brag to Wall Street analysts about how they were able to successfully cross sell all of their customers on multiple products or accounts. This ingrained culture and system collapsed when the bank ended the quotas on October 1 of 2015. Wells Fargo claimed it had fired 5,000 employees who were guilty of the unauthorized accounts opening.
The bank’s problems from the Wells Fargo scandal are more than just the penalties from regulators, lawsuits, and investigations. The executives have faced a grilling before the Senate Banking Committee. They will now have to tear down and build back from the ground up their performance management and sales incentive systems which extend back over two decades. This will require massive efforts and enormous capital expenditures on recruiting, training, and developing safeguards to protect customers from abuses by the bank and its employees. Consultants for the bank estimate it will require from three to five years from 2016 to rebuild appropriate sales and management infrastructure.
Because of this Wells Fargo scandal, the bank CEO John Stumpf hosted a conference call with 500 of the bank’s executives to explain their vision for a corrective response. The bank is seeking to add an incredible 2,000 more risk management employees. They have already installed a new head of retail banking, as Carrie Tolstedt retired in July because of the investigations into the bank’s high stakes sales culture. Incidentally she and then Executive VP of Community Banking Stumpf were responsible for the aggressive shift in sales culture at the bank back in the early 2000s.
The retraining of Wells Fargo staff is going to be extensive and difficult to orchestrate as well. Up to 100,000 employees working at over 6,000 branches will be involved once the new sales systems are implemented. The bank has already lost a portion of its retail banking business and admits it may lose more because of its severely tarnished reputation.
Wells Fargo took on the cross selling concept around two decades ago. They embraced the idea of supermarket banking for their primary banking model. By the turn of the century, the company’s annual report called its branches “stores.” The CEO Stumpf has admitted he still loves the concept of cross selling. He stated before the Senate Banking Committee that this was his “shorthand for deepening relationships.”