I understand the individuals responsible for opening fake accounts, get bonuses from their employer for ‘selling’ more accounts…but how does Wells Fargo actually make money on this…how does it financially benefit the company for me to have 7 savings accounts instead of one?
My credit union has incentives for me to have multiple accounts and services, none of which really cost me anything extra; Do I need to open another checking account to get a better interest rate? Sure! put $25 in it and I’ll never use it.
I believe that there were account fees normally applied to low balance accounts that WF would collect. Some folks only found out about their extra account when those fees pushed then into overdraft.
But that is beside the point. The “rogue agents” were acting to game a quota/bonus system for themselves. They weren’t looking to benefit the company as a whole.
This is the crux. The incentive structure was all screwed up. Salesmen and their managers were given bonuses based on how many products they sold, whether or not those accounts actually earned any money. A lot of the accounts might be credit cards that were never used, or deposit accounts that were never funded and eventually closed, etc.
There’s no end to the ridiculous results you can achieve when the incentives are perverse.
I’m not asking about the sales people and the incentives they have to financially benefit by gaming the system.
I’m asking about the general company policy and practice…How does the COMPANY benefit from having me open more accounts, legitimately or not? I don’t see how opening more accounts equates into more dollars into the companies coffers…or at least enough to pay for the cost of the time of sales people to push them.
I only need 2 accounts. I have 5, they don’t cost me anything extra. The company hasn’t gotten any more money from me because I have 5 instead of 2. Even if I did overdraft on one account, the fee charged doesn’t even seem to cover the cost of the time the employees spent telling me about new accounts and maintaining them.
Sometimes when an account holder opens a new account, he or she moves new money to that bank. Say my mother has most of her money at the credit union. Their CD rates are pretty good, so she moves one of her other CDs from the local bank to the credit union.
From you opening more accounts? WF probably doesn’t benefit much at all (other than the possibility of getting low-account-balance and overdraft fees, which would be contested quickly).
WF benefits from having a lot of new customers open accounts, because those new customers are probably bringing significant money in. Unfortunately they made the incentive, “open new accounts” instead of “bring in new customers” and their staff found a loophole.
If they charge any kind of fees or interest, monthly or otherwise for those accounts, then that’s how they make money on them, even if they don’t actually make money by lending your deposited money back out, or investing it somewhere else (how banks classically make money).
I mean, a bog-standard Wells Fargo checking account charges like $5-10 per month in fees, which is almost certainly more than they can get from investing/re-lending some guy’s $500 balance.
I’m betting the bank had marketing research that showed the obvious – customers with more accounts were more profitable customers. If a person has a checking account, the bank would make more money off that person if they also opened a credit card account or got a mortgage. This translated into creating incentives for bank representatives to push new accounts on existing customers. But front-loaded incentives work better. A bank teller will respond more quickly to “get $20 if you open a new savings account” than to “get an incentive of 0.01% of the average balance of a new savings account on the account’s anniversary each year it remains open and funded.” So, the bank created incentives to open new accounts regardless of whether those accounts were ever profitable. And some tellers responded by opening up unwanted, unprofitable accounts in droves. The fake accounts made the news but it probably generated thousands or millions of real accounts that actually contributed to profits. It seems the bank kept the program for at least five years because they probably believed it was working on balance even if over the course of five years they discovered and fired thousands of employees who gamed the system with fake accounts.
Some good and some bad info in this thread so far.
First, on the obvious side, a number of these accounts that were opened without permission were credit card accounts. Obviously, a credit card account, if opened legitimately by a customer who has a deposit account, will benefit WF
The real question of the OP, then, is probably more around whether a deposits customer will provide more revenue to WF if they open up an additional one (again, assuming it is legitimate). The answer is, on the whole, yes, it will. This is most obvious if it is a different type of deposit account. So if a customer has a checking account, but no savings account, a new savings account can cause the customer to bring more money to WF.
I don’t know exactly what WF incentive system was (and I agree that it was probably faulty), but I imagine most of the focus was on offering a different type of deposits account, whether it was a Money Market, CD, or whatever. Having said that, there can be a benefit to the bank for a customer who has a checking account and then opens a second checking account, but it is not nearly as clearly beneficial as opening a different type of account.
What I’m curious about (haven’t actually looked into it yet) is whether this is a matter of thousands of bank workers creating these accounts as random acts of greed, or if it was something more conspiratorial and coordinated?
It’s sounding like maybe it was just onesie-twosie random greedy people, and they’d fire them as they found them, and over the period of time, it ended up being 5000+ people over the entire nation.
In that case, the real problem is not recognizing that the incentive program rewarded this kind of fraud, or recognizing it, and continuing on anyway.
One way the bank makes money is by changing more in fees. So if I have a policy that if you don’t have a balance of at least $1,000 in your account or else I charge you $2.50 a month in “maintenance fee”, by splitting your legitimate $1,000 into two $500 accounts, I now get to charge you $5.00 a month because you are under the minimum on TWO accounts.
And let’s not forget the intangible ‘marketing effects’ of all these fake accounts that makes WF money in the long run. After all, they convinced Warren Buffet to be one of their main investors and a lot of people will blindly follow whatever Buffet invests in as he has a long history of finding undervalued opportunities. So, you open millions of fake accounts, and now Wall Street analysts say “Wow, compared to Bank of America, WF has increased their number of new accounts by 23%!”. This news hits the street, and people drive up the value of their stock, which attracts more investors, and the circle of life continues…
It’s unclear if the upper management knew (or cared) that these phony accounts were being created because it had the short term effect of making WF look awesome. Meanwhile, customers are used to getting screwed by their banks, so paying fees is not uncommon. But when you screw LOTS of people, and then you start to get really out of control where you screw the same people multiple times with numerous fake accounts, enough folks will complain and report them, which is when investigators start to notice.
I don’t know the answer and I wonder myself. I should also correct my statement about the incentive program to say that I don’t know what incentives Wells Fargo offered. I seemed to suggest authoritatively that it was $20 for opening a new account when the truth is, I have no idea what their incentive structure paid or whether it was even the same program over the five years. I just know that they created incentives for people to create fake accounts for at least five years and they didn’t eliminate those incentives for at least five years even while they realized that it led to thousands of people, singly or otherwise, to open thousands of fake accounts. I suspect Wells Fargo knew of the problem but they thought their incentives generated enough new profitable accounts to offset the damage the incentive programs caused to employee morale and customer satisfaction.
You might be right that this activity helped Wells Fargo sell their story of account growth to Wall Street. I don’t know how valuable that would be to them.
The interesting thing is, these fake accounts probably didn’t really make them any meaningful amount of money. One article says that they are paying restitution to affected customers of $5 million. It also says that Wells Fargo underwent an independent review that resulted in refunds of $2.6 million. Wells Fargo fined $185M for fake accounts; 5,300 were fired
Even if we combine these and assume that they got $7.6 million in extra revenue over the five years, that is nothing compared to their earnings. They earned net income of $23 billion in 2015, and a total of $68 billion from 2011 to 2015. If so, the extra revenue from fake accounts amounted to less than 0.1% of their income over that period. It was basically irrelevant to their financial performance. Wells Fargo Quarterly Earnings - Investor Relations - Wells Fargo
I suspect part of the reason the revenue was so low was because: (1) tellers opened a bunch of accounts that counted for purposes of their metrics but didn’t actually cost customers any money, like credit card accounts with no annual fee, or (2) the accounts sometimes generated fees but customers complained and the fees were refunded and the accounts closed.
It could be a combination of both- at my job (not in banking or finance) there are all sorts of metrics most of which have to do with how often our clients are visited. The number that supposed to matter is the number of clients visited - 2 clients seen at the same place is two visits. Every now and then people decide to “juke the stats” to look better - for example, two workers will conduct 2 visits together and record 2 visits each for a total of 4. Mostly the workers do this on their own and it’s not coordinated at all , but occasionally a supervisor or manager will direct his subordinates to do this.And they do this without any incentive other than making it look like more visits were conducted. Forget about how many would be doing it if there was a monetary incentive.
Look at the racks with the glossy brochures extolling the virtues of “Products”.
Pick up a few and browse - see the spaces “For Bank Use Only”? In the case of one product I was involved in, the 9 spaces field was the employee number of the person who “Made the Sale”.
The branch employees had already written in their ID numbers. (and yes, they Were the SSN’s of the employee.
They’d risk someone discovering that “Employee ID” = SSN just to have a chance that someone would pick up the brochure and actually open an account by mail.
But investors were mightily impressed by WFB’s ability to “Cross Sell” - getting existing customers to buy new “products”.
This is the big story here - that WFB’s vaunted “Cross Selling” was, in fact, fraudulent - they were no better than any other mega-bank.