We’ve asked several Banking Exchange bloggers to examine the Wells Fargo affair from the vantage of their areas of specialty. In this installment, banking and fintech expert Chris Skinner of the U.K. puts some perspective on the causes and magnitude of the Wells matter. Skinner makes clear why reputation risk needs to be a factor in retail banking sales and product design.—Steve Cocheo, executive editor and digital content manager
About 5,300 Wells Fargo employees have been caught faking customer account openings in order to hit their sales targets. That sounds pretty disgusting, doesn’t it?
But it’s nothing new.
In fact, here in “Old America,” or, as some call it, Britain, we have been living with this for half a decade.
“Retailiazation” of the U.K.
During the 2000s, leading up to the crisis, the U.K. banks became hard-core retail banks. By retail, I mean retail.
They hired-in people from big retailing companies like Asda, now part of Walmart, and told staff to get out there and “sell, sell, sell.”
And sell they did.
Some say this was part of the crisis conspiracy—the sale of mortgages to those who couldn’t afford them, for example—but the real mistake was thinking of retail banking as the same as retailing.
There’s one critical difference: risk.
Sales as ongoing commitment
In retailing, there is no risk when someone buys your product as, once paid, the deal is done.
In retail banking, the whole operation is about managing and minimizing risk as, once the deal is done, will the customer ever pay the bank back?
Hence, when U.K. bankers loaded their customers with credit to their eyeballs, no wonder the customers felt betrayed when the banks started to squeeze them for payback.
So what’s all this got to do with Wells Fargo’s staffers faking accounts?
The key is that it’s part of that “pile ’em high and sell ’em cheap” retailer’s mentality for, in a retail operation, every member of the frontline workforce is given sales targets.
In a clothing store, the manager may have a target of $5,000 sales per day and a special promotion on jackets. In a bank, it’s 50 account openings per day and a special promotion on credit cards.
Fail to reach those targets for 90 days in a row and you’re out.
That fear of losing your job then creates bad behaviors based upon fear, such as faking customer account openings in the case of Wells Fargo.
But I said we Brits had seen this for a while now, so what happened here?
British banks’ ongoing learning experience
Well, during the last decade, all the U.K. banks felt it was a good idea to sell Payment Protection Insurance, or P.P.I. for short.
P.P.I. is an easy product to understand, with a very specific purpose. That is, if you borrow from the bank and have problems later, such as losing your job, then the insurance will cover your loan repayments until you find a new job. Of course, that sounds great.
The issue that arose is that the retail bank senior management teams felt this was such an easy sell that they targeted every member of the banks’ front office teams to sell, sell, sell it.
And sell, sell, sell it they did. In fact, they sold it so hard that the customers got hit hard:
• Millions of customers got signed up for P.P.I. without even knowing what it was.
• Some were signed up because staff ticked the P.P.I. box without telling them what it was for.
• Others got signed up when staff filled in the applications for them, and signed signatures on their behalf, after the customer had left the branch.
In other words, as we say over here, it was a “right royal stitch-up.”
When the U.K. complaints authority saw a swarm of angry customers asking for their money back, they eventually acted, with the regulator stating that these activities were illegal and the banks must pay back all the premiums with interest if the customer asked.
That was in 2011 and, so far, that decision has cost the U.K. banks $50 billion in paybacks and interest. That’s not including their internal costs of dealing with the millions of P.P.I. payback applications. [Read a recent official update on the P.P.I. situation.]
So, the large financial penalties levied on Wells Fargo seem puny by comparison.
But what if they were not alone?
What if employees of many U.S. banks were indulging in such illicit activities?
Could we be approaching America’s “P.P.I. moment”?
I hope not. But, just remember, retail banking is not the same as retailing. One lives with high risks whilst the other does not, and mixing the two mentalities is always going to be dangerous.