The final quarterly reports for 2016 are in, and the news does not bode well for banking giant Wells Fargo, embroiled in a fake-account scandal that defrauded hundreds of thousands of customers. In fact, the San Francisco-based national bank has admitted that for years, its employees had been creating fake checking accounts and opening unauthorized credit cards in real customer names – up to two million at last count.
That impropriety includes 565,443 “ghost” applications for credit card accounts in their customers’ names, but without their knowledge or consent. Once opened, those accounts racked up over $400,000 in annual fees, interest charges, and overdraft protection fees – all pinned on the unwitting consumers.
Reportedly, the practice was not a series of isolated incidents or perpetrators, but widespread within Wells Fargo. The bank has confirmed that they’ve fired 5,300 in the wake of the scandal (almost all of them low-level). However, CEO John Stumpf did resign after being disgraced and hammered for the shady practices by lawmakers and two congressional hearings.
In its first full quarter financial since the controversy came to full light in September 2016, Wells Fargo, based in San Francisco, marked some ominous numbers:
The bank reported that new credit card applications were down 43% in Q4 of 2016 compared to a year ago,
Likewise, the number of newly opened checking accounts dropped 40%.
Teller transactions inside branches are down 6% from the previous year,
Customer interactions with in-branch bankers also fell 14%.
Wells started taking on more water even during December’s usually robust holiday activity and spending, with credit card applications down 7% from November and a whopping 43% lower than December 2015.
Add it all up, and it’s no wonder why Wells Fargo saw its profits fall 4.3% to 21.9 billion in Q$ with a net income of $5.3 billion, which was larger than expected even accounting for the scandal.
In the community banking division – the unit largely responsible for all of the unauthorized accounts – profits fell a sharp 14% year-over-year.
But there was a hint of good news for Wells Fargo execs and shareholders, as somehow, the bank increased its deposits this quarter, even with the financial scandal ongoing.
But that could mask a greater problem for the bank, as their expense ratio (expenses divided by revenue) increased to 61% in Q4, higher than a normalized, safe range for banks.
With the news of the financial hit, analysts are left speculating whether Wells Fargo – the second largest consumer bank in the U.S. behind Bank of America – will remain healthy.
But the greater problem is one of trust as revelations show that the unethical and illegal activity was based more on keeping up with the aggressive sales culture of Wells Fargo, not individual financial gain (employees didn’t steal money from the accounts, just opened them to boost their monthly sales numbers.)
Top open these millions of phony checking accounts and credit cards, employees were using dummy email address and creating fake PIN numbers, enrolling duped customers in online banking.
In a show of blatant and despicable practices, hundreds or even thousands of Wells Fargo employees were targeting “immigrants who spoke little English and older adults with memory problems,” according to a confession by a fired Wells worker.
The Wells Fargo scandal may have hit the front pages like a tsunami, but the actual investigation was more like a steady drizzle, starting in 2013. Restitution, likewise, has been mostly slow and unforthcoming – aside from a lot of rosy rhetoric by Wells Fargo brass. The bank has vowed to change its aggressive sales culture that created so many quotas, as well as hamper cross-selling multiple accounts to a single customer.
Since 2013 there have been thousands of individual customer lawsuits against the banks, but as of December 9, 2016, only $3.2 million in fees and related charges has been refunded. Wells is reportedly bullying these lawsuits into arbitration to sweep them under the rug and pay lesser amounts.
However, the Consumer Finance Protection Bureau did slam Wells with a $185 million fine, along with mandating they refund $5 million to customers. It’s not substantiated how much of that Wells has ponied up thus far, but officials in Los Angeles have filed their own federal class action suits for damages, as well as others.
Of course, all of this begs the question if Wells Fargo’s trust with the American public has been permanently violated and if smart consumers will turn to other banks for their services, as well as independent mortgage brokers for their home loans, to avoid being defrauded by Wells Fargo in the future.