Bank Regulation

The Wells Effect

Last week, the CFPB came down on Wells Fargo when it exposed its egregious business practices, all in the name of being focused on the customer. And for that, Karen Webster says, the CFPB should be commended for a job well done. Wells, on the other hand, has handed the regulators a free lifetime pass to crawl all over every bank whether they deserve it or not. The Wells Effect, Webster says, will be a reality that all banks will have to deal with from now on. And the biggest loser, she says, won’t be the banks but the consumer, who will likely see bank innovation slow to a crawl and perhaps some of their favorite services pared back or even shuttered.

The Wells Effect

The regulators haven’t made it much fun to be a bank in the last five or six years. Thanks to the shenanigans at Wells Fargo, it’s probably going to get much less fun — for all financial institutions. And, this time, it’s not because the CFPB was picking on a big bank just because they’re big and big banks are in Washington’s bullseye. The business practices that the CFPB exposed reflect a serious, systemic failure on the part of Wells Fargo, and the CFPB deserves all of the credit for exposing it. It did a good thing last week.

Let’s take a little walk down regulatory memory lane to put things in context, shall we?

In 2010, Dodd-Frank was the landmark 14,000-page bill that started that big, no-fun ball for banks rolling downhill. BTW, that’s the equivalent of 11.5 volumes of Tolstoy’s “War and Peace.” But Congress was out for its pound of flesh, for the part that it believed “big banks” played in the financial crisis.

Among other things, Dodd-Frank gave the banks the Durbin Amendment that ate into the bank’s ability to make revenue on debit cards. That put a dent into the revenue associated with offering and maintaining checking accounts, one of the bank’s most precious assets and a strong and sticky foothold to the consumer.

Dodd-Frank also gave the industry the CFPB and almost gave it Elizabeth Warren as its chief in 2011, too. Instead, Richard Cordray, via a recess appointment, was given the mantle of the country’s consumer czar in Jan. 2012. Over the last four years, he and his team of more than a thousand have poked and prodded at many banks. That poking and prodding has almost always uncovered something that the CFPB didn’t like, which was almost always followed by a public shaming and a hefty fine.

I’ve been highly outspoken in the past about the depth of understanding — that is, the lack thereof — about the highly complex payments and financial services sector that seems to guide the CFPB’s decisions. It doesn’t really like a lot of what it sees, but that doesn’t always make what it sees bad. In the past, the CFPB — with its team of bureaucrats, not payments experts — was often guided by how much it can brag about the big fines it used to whack those “big bad banks” with, instead of righting a legitimate wrong.

I’ve also been pretty critical of the CFPB’s governance structure, one that essentially allows the CFPB to be judge, jury, appeals court and executioner for the things that it finds at banks that it doesn’t like. The banks’ efforts to fight back are often counterproductive: They never win, and sometimes, the fines get even bigger.

The combination of operating principles and its absolute authority to rule absolutely has also resulted in a general fear on the part of anyone in financial services to speak out publicly or even push back against anything that it does. As Jamie Dimon said, famously, last year, he was done fighting the regulators since it was “impossible for a bank to fight the U.S. government.” It is a lot faster and easier to just write a check and be done with it.

So, for the last several years, the dance that the CFPB has had with banks has gone something like this:

CFPB picks a bank. It finds stuff it doesn’t like there. Bank admits no wrongdoing to make it harder for the plaintiffs’ bar to win class-action lawsuits against it and to keep its damages down. Bank writes check to settle a fine for alleged wrongdoing.

Soon thereafter, teams of CFPB compliance officers turn up at the offending institution to make sure nothing bad ever happens again. Bank hires more internal compliance people and outside consultants and puts lots more policies and procedures in place to make sure that the CFPB finds no other problems. Bank inserts legal and compliance officers into every new product discussion, slowing innovation to a crawl. Innovation slows anyway since there’s less money to fund it now that compliance costs have skyrocketed and no one wants to get on the wrong side of the CFPB by doing something new that it may not like.

Currently, the CFPB has made it clear it doesn’t like prepaid cards. Its proposed ruling reflects a lack of understanding of the reality of how “overdrafts” on prepaid cards work, who uses the feature and how implausible it is to treat them as a line of credit. If the ruling stands as is, consumers will probably have to kiss goodbye that feature of the product, harming more consumers than helping.

The CFPB also doesn’t seem to like payday loans, even though the primary borrowers are middle-class banked consumers who know what they are doing and pay them off without rolling them over. Sure, there are scumbaggy lenders in this space, but a few scumbags does not an entire industry make. Implementing the CFPB’s ruling as it now stands would simply make it tough for the legit players who use technology and follow the rules to stay in business. That’s another potential blow to the consumers the agency is out to protect — it’s not like the CFPB, or anyone in D.C., is going to give them the small-dollar, short-term loans they obviously need.

The CFPB really doesn’t like arbitration, either. “Send in the plaintiff’s bar” is what the orchestra is warming up to play if its ruling sees the light of day, enriching no one but the ambulance-chasing attorneys who bag millions each time one of these class actions is formed and certified. If consumers win a class action, they end up with a few bucks at most. The lawyers, on the other hand, get a down payment on a new oceanfront home in the Hamptons or a Gulfstream G650.

But after reading the many accounts of the activities at Wells Fargo that resulted in the largest fine that the CFPB has ever levied on a bank — $100 million — and the pile-on by other regulators of an additional $85 million, I wonder how much of its current stance on all of these issues — and everything else it may be looking at now — is the result of simply being outraged and disgusted at what it found.

And concluding that, if one of the oldest, biggest and most storied banks in the country behaves this way, then the banking industry generally in the U.S. has become unhinged.

Cam Fine, president and CEO of the Independent Community Bankers of America, said it best:

“While Wells Fargo has the luxury of throwing money at the problem to make it go away without its board or senior management being held accountable, the individuals and local institutions affected by its actions will continue to suffer for years to come,” Fine said.

Yes, Cam, they surely will.

Depository institutions — every one of them, big and small, local, regional or national — are now going to be put under a microscope, even if they are squeaky clean and don’t deserve the extra attention. And the ripple effects will be palpable.

Every complaint to the CFPB now, regardless of how unfounded or ridiculous-sounding, will be investigated, tying banks up in knots while examiners turn the bank inside out looking for any shred of evidence of wrongdoing.

Why wouldn’t they? The actions of Wells Fargo employees who committed fraud by opening up nearly 2 million fraudulent accounts will just feed into the narrative that there are surely legions of Joe and Jane Schmoes at Name Any One Of The 14K FIs In The U.S. are surely doing bad stuff, too, just not at the same scale.

Banks will be scared to death to do anything that calls attention to anything new, even the big ones. Innovation will be chilled, while banks divert attention internally to make sure that all of their “i’s” are dotted and all of the “t’s” are crossed.

At just the point in time, of course, that the technology, the tools and the consumer’s appetite for innovation has increased.

Consumers, who can’t help but read about the outright fraud committed by Wells’ employees — it’s all over the news — will wonder whether all banks and bank employees are like this — even at their own bank. They might not have really understood the ins and outs of LIBOR or the mortgage mess that cost banks billions, but they surely understand what happened at Wells. The trust in big banks that has been eroding anyway could very likely erode even further. And millennials, that segment of the population that never wanted to have much to do with traditional banks, will have yet another reason to thumb their noses at them and go somewhere else.

So, if banks thought that the CFPB was breathing down their necks before last week, they better buckle up. The last four years will look like a cake walk compared to what’s coming next.

And for that, they have Wells Fargo to thank.

 

When Vision Goes Too Far

Go to the Wells Fargo website today. I did on Saturday (Sept. 10), and here’s what I found:

“Make your Wells Fargo relationship even more beneficial. Enjoy the benefits of discounts on interest rates and banking services, fee waivers and more.”

The Wells Fargo customer relationship focus was legendary and something that every bank wanted to emulate. It was the bank’s calling card and what its executives touted as its competitive advantage and core to its profitability. They say that its customer tracking system is so fine-tuned and precise that it can predict what customers need before they’ve even asked for it. As a result, Wells officials claimed that they sold roughly twice the number of banking products and services to its customers than the typical bank — their four to every other bank’s two.

A senior Wells executive, interviewed by American Banker in 2014, was quoted as saying that, since Wells focuses mainly on selling more products to existing customers, “we don’t always have to be that aggressive in terms of our acquisition bonus and, therefore, our acquisition costs.”

In other words, Wells doesn’t need to pay to bring customers in its front doors, since it fishes in its own well-stocked pond, with systems in place to keep cross- and upselling all the time. This executive went on to further state that “82 percent of the bank’s new credit card accounts are opened in its branches, mainly by people who come in to open checking accounts or do other business.”

And as we’ve learned now, not always with the consumer’s knowledge or consent. Employees issued 565,000 credit cards to customers without their consent, opened fake email accounts to enroll customers into online banking and established fake bank accounts.

 

But How And Why?

From what employees have said, it was all in a (high-pressured) day’s work.

The mantra to keep those four-products-per-customer benchmark alive and capable of being bandied about at industry conferences and analyst updates was part of the Wells Fargo employee job requirements. Requirements that were to be met under the rubric of being customer-centric and, apparently, at all costs.

It makes one wonder how this went unnoticed by the bank for as many years as it appears to have done. Didn’t anyone notice that 565,000 credit card accounts didn’t carry a balance — ever? Didn’t anyone notice that 1.5 million checking accounts were without monthly activity yet were racking up service charges? Didn’t anyone bother to investigate the many similar-sounding complaints being leveled up and down the chain about the aggressive customer account benchmarks that employees were being asked to meet?

What seems particularly shameful is that the only people who have paid the price so far are the 5,300 people who did what they, apparently, were told to do (or, at least, were “incented” to do) by the executives at the top of the house. The same executives who, apparently, still have jobs this Monday morning. Yes, they are very apologetic, but they are still collecting a paycheck signed by Wells Fargo.

It’s also worth remembering that this isn’t Wells’ first big payout rodeo for something that hurt the consumer. Its practice of stacking payments so that consumers were leveled $35 overdraft fees for multiple $15 purchases resulted in a $203 million settlement that it appealed — and lost. And it was slapped recently with a $4 million fine over student lending. It’s no wonder Amazon pulled the plug on the student loan promotion gig they announced seven weeks ago and abruptly shuttered.

 

Who Really Wins?

Sadly, there are many big losers here — among them, the consumer.

We already know that there will be Senate hearings on the Wells fiasco and, with that, more support on Capitol Hill for even more oversight of the banks that both sides of the aisle now seem to loathe. The CFPB, with its almost blank checkbook, will probably staff up and probably send more agents into the field.

Any hope by anyone in financial services that the CFPB would be changed or dismantled in the next administration also went up in smoke last week. If Hillary gets elected, Sen. Warren could very well be Secretary of the Treasury, leading the charge to break up big banks and imposing new rules. Whatever position she occupies, you can be sure that she and Cordray, or his successor, will be banks’ and banking’s worst nightmare come true for as long as they are there.

All the while, citing Wells as their poster child for how evil banks are and how they prey on consumers to pad their own bottom lines. It’s a tough story to refute.

Meanwhile, innovators who’ve seen banks as great channels for distributing their innovations will see that channel dry up. Banks who moved slowly before will make glaciers look fast. Giving rise, of course, to a whole new crop of innovators who see the opportunity to use the digital reality of today to deliver services the way consumers want them delivered — and from institutions who don’t bring reputational baggage along with them.

Some innovators who’ve run the CFPB’s regulatory traps are also probably polishing their strategic plans as we speak, using this as an opportunity to swoop in with their new products to take the place in the consumers’ hearts and minds that the traditional bank once did. An Accenture study done last year said that consumers would just as soon bank with PayPal, Walmart, Square or even their telco. Somehow, that doesn’t seem so farfetched now.

Of course, where there’s turmoil, there’s also a thousand innovators who see a way to use technology to solve the big frictions left in turmoil’s wake. I’ll bet the CFPB Compliance Technology Tracker is taking shape in some accelerator somewhere right this very minute.

But even they will have to pay extra special attention to the long arm of the CFPB.

The big loser, however, could be the consumer, who could find themselves being denied access to innovative products and services or paying more for the services they get now from banks, because it costs all banks — not just the ones who play fast and loose with the rules — more to deliver them. And if the CFPB uses Wells as the rationale for making rules that punish the banks without understanding the unintended consequences of those rules — like we could be facing with prepaid, payday lending and arbitration — consumers could really stand to lose access to valuable services that they need, like and use wisely.

The actions of Wells Fargo employees suggest that there is something pervasively and culturally amiss at that organization that would allow this to happen at all, much less at the scale that it was said to have occurred. Now, The Wells Effect of their bad behavior will be felt by every bank — not just theirs — and the consumer — undeservedly.

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