In the wake of the announcement that Wells Fargo would pay $185 million in fines, plus millions more in restitution to customers who were charged fees after employees unknowingly opened bank or credit card accounts in their names, finance industry experts and consumer advocates were left scratching their heads over how things went so wrong, for so long, while bank customers tried to digest what this meant for them.
"I'm just amazed at the scope of it and what appears to be a pretty significant breakdown in internal controls," said banking consultant Bert Ely.
"If 5,000 people were engaged in it, how many do you think knew? This is not an instance of improper oversight," said Julie Ragatz, director of the Center for Ethics in Financial Services at the American College of Financial Services. "This is an instance of thousands of people believing that this behavior was expected and would be rewarded, and that message came from somewhere."
Wells Fargo has long prided itself on its ability to cross-sell products to existing customers, a tactic that became more important after the financial crisis. After financial reform laws and low interest rates cut into other revenue streams, banks came to rely more on fee revenue, especially for transactions like overdrafts, on which they collectively earn approximately $32 billion a year, according to financial data and research firm Moebs Services.
"It comes down to expenses — financial institutions can't produce enough from their loan and investment activity to cover their expenses," said CEO and economist Michael Moebs. "Fees become their lifeblood," he said. Service charges on deposit accounts at the nation's biggest financial institutions comprise about 15 cents out of every dollar in income, Moebs said.
Banks have strict protocols around account opening designed to thwart money launderers, terrorists or other criminals when opening accounts, Ely pointed out, yet thousands of employees managed to open an untold number of accounts going as far back as 2011.
The size of the scandal prompts questions. "If 5,300 people were terminated on this over five years… they're firing about one percent of their branch workforce every year," Ely said. "There were so many people being disciplined… Did the bank respond soon enough, quickly enough, aggressively enough?"
In a statement, Wells Fargo said it had refunded $2.6 million so far "for any fees associated with products customers received that they may not have requested."
In an FAQ about the settlement, the bank urges customers to use online banking to monitor their accounts, although calling the number on their statement or visiting a branch also is an option for worried customers. Part of the settlement terms with the CFPB stipulated that Wells Fargo hire a third-party consultant to comb through the bank's books back to 2011, and identify and contact customers who might not be aware that accounts were opened in their names.
There currently is no set timeline for completing that, but banking experts say it could take a while, given the scope of the scandal.
"Obviously, it's a fairly high number of customers," Ely said. "I would think it would take many months... to identify customers who were improperly charged and to determine how much each of them were overcharged."
In the meantime, customers took their ire to social media, flooding Twitter and Facebook with complaints and concerns.
The bank did not immediately respond to a request for an estimate of how many customers were affected, but consumer advocates said it wouldn't be a bad idea for customers to check their bank statements and credit reports for any strange activity, such as unauthorized charges or withdrawals.
This incident also illustrates how important it is for people to check their credit regularly, Wu said. Using annualcreditreport.com, people can get one free credit report a year from Experian, Equifax and TransUnion.
Two specialty bureaus called ChexSystems and Early Warning both keep tabs on negative bank activity, so if a Wells Fargo customer had an account opened in their name unknowingly, and that account incurred fees before it was closed, these bureaus would keep a record of that kind of behavior.
Wu said customers should hang onto any letters they get from the bank pertaining to remediation in case they need to prove their case and dispute negative credit activity that was triggered by a falsely opened account.
This isn't the first time Wells Fargo has boosted its fee revenue at customers' expense, said Chi Chi Wu, staff attorney at the National Consumer Law Center. "They were the ones that were most aggressive about reordering transactions from high to low to maximize overdraft fees," she said.
Still, the scale of the operations exposed by this week's settlement were striking, Wu said. "The extent of, basically, the fraud going on that was kind of surprising," she said. "It's out and out illegal — there's no dispute that opening up a credit card in someone's name is not allowed under the truth in lending act." (Under the settlement, Wells Fargo did not admit to wrongdoing.)
Many blamed the way Wells Fargo compensated and incentivized employees for opening new accounts. "They clearly failed — on a massive scale — to build an appropriate culture to support their incentives," Ragatz said.
"People do what they think they're going to be rewarded for doing. They were doing what they believed the senior leadership at Wells wanted them to do."