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Is Wells Fargo Scam an Indication of Major Banking Chaos?

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The recently emerged Wells Fargo (WFC - Free Report) sales scam has raised concerns for the banking industry as a whole. Federal regulators and policymakers are of the opinion that Wells Fargo is not the only bank which is engaged in cross-selling. In fact, cross-selling is now the lifeline of the entire banking system. Regulators stated that they are searching for similar behavior in other banking and non-banking financial institutions as well.

Following the Wells Fargo incident, Thomas J. Curry, Comptroller of the Currency stated, “I have directed that we are to do a horizontal review so we will be looking specifically at sales practices at our largest banks and midsized banks.”

Director of the Consumer Financial Protection Bureau, Richard Cordray added that the CFPB will jointly examine sales with the OCC. But the focus will also be on the compensation structure of banks, as incentive compensation schemes are a major problem witnessed across different markets, according to him. He said, "You should be focused on customer satisfaction, not on bare numbers. And there are monitoring systems that can be put in place."

John Stumpf, who appeared at the panel during the first part of the hearing, said that Wells Fargo told the OCC about its employees opening false accounts as early as 2013 but neglected to tell the CFPB until 2015. Also, lawmakers were outraged that Wells’ customers who asked to be refunded any fees from the phony accounts were forced into mandatory arbitration.

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How Cross Selling Works

Under this tactic, once a customer opens up a basic savings or checking account with a bank, the employees are forced to sell him/her more products even if those are not good fit. The new account offered could be a retirement account, a mortgage account or another savings account. The employees are also encouraged to open new credit card accounts in order to protect overdrafts without the customer’s authorization.

In order to execute their tactics, banks like JPMorgan (JPM - Free Report) , Citigroup (C - Free Report) and Bank of America (BAC - Free Report) have been physically transforming their branches by opening up smaller teller windows for depositing checks or account inquiries. These actually gives the bankers more space to personally assist customers with the intention of selling more products to them.

Low Interest Rate Environment Propelled Cross Selling

The financial crisis of 2007 led majority of the banks across the globe to shift their focus towards cross-selling. As the Fed cut interest rates to almost zero during the Great Recession, banks could no longer earn revenues in the form of interest income. Hence, they inclined towards earning revenues from other sources. One such source for non-interest income was fee income. Banks knew that the more products they could sell to customers, the higher would be their fee income.

Bob Hedges, a banking industry consultant with A.T. Kearney, stated that another benefit of cross-selling is that if a customer has several products with the same bank, it becomes more difficult for them to switch to a new one.

Customers’ Feedback Supports the Fact

According to a survey conducted last year, nearly 40% of Wells Fargo’s customers complained that the employees would constantly push products they did not need or want. Even though none of the other banks have been alleged of wrong-doings so far, majority of the customers made similar complaints according to the survey. Nearly 31% of the customers at Bank of America and 27% at both JPMorgan and Citigroup said that they felt overly pressurized for buying products they didn't want or need.

Consumers have filed more than 31,000 complaints since 2011 about the opening, closing and management of their accounts and issues dealing with unauthorized credit cards.

Last year, Citibank and its subsidiaries were asked to pay $700 million to consumers for allegations of misrepresentations related to cost and benefits of credit cards. The settlement, however, did not contain any admission of wrong-doing.

Cordray said, “We’ve put the entire banking industry on notice that this kind of conduct is completely inconsistent with what it means to be a bank.”

Bottom Line

It appears that Wells Fargo scam is just the beginning of similar scams coming under the spotlight.

This will add to the concerns of the banking industry, which is already grappling with a numbers of issues.

Wells Fargo currently carries a Zacks Rank #4 (Sell). However, JPMorgan, Citigroup and Bank of America carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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