Wells Fargo, America's largest bank by market capitalisation, has been fined USD 185 million (about ₹1200 crore) for a widespread scam its employees had been running for at least five years. In order to meet extremely high sales targets, Wells Fargo employees were systematically creating fake additional accounts for existing customers. They would use a variety of techniques to impersonate customers in their computer systems--including surreptitiously changing their debit card PINs and using fake email addresses. The fake accounts added could be credit cards, savings accounts or investment services. The employees actually moved money from customers' existing accounts into new ones, either as fees or as deposits. Their actions resulted in many accounts falling below minimum balance or other requirements and resulted in fines that were deducted from their funds.
If one read some of the detailed accounts that have appeared in the US media, one realises something surprising--this wasn't a huge conspiracy. Despite the fact that 5,300 employees have been found guilty and sacked, it seems that almost all of them were acting on their own. Essentially, the bank had incentivised such behaviour and then turned a blind eye to how the employees met their targets. The investigators' analysis has also shown that the employees didn't make money out of the scheme because they had to meet the targets just to keep their jobs. Interestingly, the bank didn't make much money either because there was no real activity in the fake accounts. The income from fines was quite small given the large scale of the accounts. In all, over a five year period, at least two million fake accounts were created. The sad part is that investment analysts don't see the entire affair as having much of an impact on the bank--after all, the fine is not even one per cent of its 23 billion dollar income.
Of course, it's common knowledge that customers of many Indian banks have had these kind of experiences. A few weeks ago, I wrote a newspaper column about how Indian banks pick customers' pockets in a variety of ways. After the column was published, I received a flood of emails from bank customers (victims?) recounting similar and worse stories. Actual forgery of signatures in order to sell useless, high commission products seems to be a fairly common activity in India. The interesting thing is that while a few of these cases are resolved periodically, the Reserve Bank seems to have no apparent interest in finding out whether they happen at scale. When one such case is detected in a bank, isn't it likely that it's a systemic problem of incentives and controls and there must be a lot more cases? Unlike the Consumer Financial Protection Bureau of the US, our banking regulator has shown no inclination to find out.
As I'd written in that earlier column, one fundamental problem is that banks are allowed to take money from customer's accounts as and when they please. When any other business needs you to pay, they have to ask for the money and you actually have to hand it over. In contrast, banks get to just take your money whenever they want to charge you for anything. Why is this the case? Instead of this facility of dipping into customer's pockets whenever the mood takes them, why can't banks--like any other business--bill you and then actually get your payment only when you give it to them? I can't think of any good reason, except that we have entrusted them with the safekeeping of our money and that we have a banking regulator who doesn't care about consumers.
Nowadays, banks continuously act in such bad faith that these fundamental questions must be asked. Of course, given its terrible track record on consumer protection, one can't actually expect the RBI to do anything. We urgently need an independent consumer protection agency for financial services, like the American one that investigated Wells Fargo.