INCENTIVES INFLUENCE behavior, as the saying goes. In an environment where they are under shareholder pressure to produce ever-increasing profits, but must also contend with low interest rates, banks face strong incentives to make money in new ways. At Wells Fargo, apparently, the solution in recent years was aggressive “cross selling” of its existing customers — that is, urging them to open credit card accounts to go with their checking accounts, and so on, in order to generate more fees. Sales personnel were assigned ambitious targets, so ambitious that many of them couldn’t hit them without fraud — and were threatened with job loss for failure. Not surprisingly, employees resorted to opening accounts, 2 million of them, in the names of consumers who may not have authorized them. Incentives influence behavior.
The total cost to customers of this chicanery at the nation’s largest retail bank was about $2.4 million in unauthorized fees between May 2011 and July 2015. And now, Wells Fargo itself has been made to pay, to the tune of $185 million in fines as part of a settlement with federal authorities and those in its home state, California, plus restitution for its customers. The bank says it has halted the sales program that led to abuses and fired many of the employees involved. Its chief executive and chairman, John Stumpf, has apologized and was hauled in front of the Senate Banking Committee on Tuesday for a tongue-lashing by senators, including Elizabeth Warren (D-Mass.), the financial sector’s toughest critic on Capitol Hill.
Ms. Warren demanded that Mr. Stumpf resign, which would certainly add a note of much-needed personal accountability — even if this scandal, bad as it is, is far from the worst to occur in the financial world of late. Even more appropriately, Ms. Warren insisted that Carrie Tolstedt, the executive who was directly responsible for Wells Fargo’s consumer banking unit, should have to give back at least some of the tens of millions of dollars in compensation she took upon being allowed to retire from the company in July (effective at the end of this year). Yet Mr. Stumpf offered only non-committal answers on that point.
To be sure, this affair may be a reminder of the myriad repercussions, negative as well as positive, of prolonged low interest rates. In the final analysis, those low rates are the Federal Reserve’s doing, not Wells Fargo’s. Still, that’s no excuse; the definition of ethical business is to figure out how to make a profit honestly even when conditions beyond your control create temptations to do otherwise. Wells Fargo failed pretty egregiously in that respect, and the more individual accountability is brought to bear upon it as a result, the better. The example would create a strong incentive for everyone in banking to behave better, both at Wells Fargo and elsewhere.