If you Google the phrase “bank cross-selling,” you don’t get many hits about the recent Wells Fargo scandal, in which thousands of bank employees were fired for the most blatant sort of corporate fraud. “Team members,” as Wells Fargo prefers to call its employees, had strict mandates to sign existing customers up for additional products. Someone with a savings account should be convinced to open a checking account, get a credit card, transfer a 401(k), and maybe even take out a mortgage. The sales targets were so high that many employees found them impossible to meet, until someone hit upon an ingenious solution: ignore the customers’ wishes, as well as banking law and basic ethics, and open up new accounts even when the clients had asked them not to. In some cases, customers were charged late fees on accounts they hadn’t requested and that they didn’t know they had.
The core of the case against Wells Fargo has been well-known since a remarkable investigative report by the Los Angeles Times in 2013, and hints of the troubles were already apparent in a Wall Street Journal article in 2011. It took years, but now the company has been fined a hundred and ninety million dollars—a record, the Consumer Finance Protection Bureau says. More than five thousand employees were fired for the offenses. This practice was so widespread around the country that it would be a truly remarkable coincidence if each team member had come up with the strategy independently. Still, only low-level managers were fired. Once again, a big bank was caught doing something awful, received a fine, admitted no wrongdoing, and no senior manager or, God forbid, C.E.O. was punished in any way.
But none of that comes up in a search for “bank cross-selling.” Instead, that search gives you a quick peek at the pressures that employees of every bank must be feeling. Here are the top results when I conducted that search: “9 Keys to Bank Cross-Selling Success,” “7 Common Sense Ways to Increase Bank Cross-Selling,” “8 Steps to Improved Bank and Credit Union Cross-Selling,” “Kicking it up a notch: Taking retail bank cross-selling to the next level.” It goes on for pages. (Google did present me with one Wall Street Journal article about the recent scandal, on the third page of results.) Many of these articles make the same key points: cross-selling is one of the surest ways for banks to make more money, and Wells Fargo is the very best at it. The former Wells Fargo C.E.O. Richard Kovacevich is often credited with inventing the strategy at his prior employer, Norwest Corporation, and then turning Wells Fargo into the industry leader.
It’s a simple idea. The average account—checking, savings, credit, whatever—doesn’t bring in much profit to a bank. Mike Moebs, a former Wells Fargo executive who now advises banks on cross-selling, told me that, when dealing with non-wealthy people, banks make an average of forty-one dollars per financial product. But banks make a huge amount on some of their products, like mortgages. By increasing the average number of products each customer has at Wells Fargo, the bank has a much higher chance of attaining the truly high-value ones. It is impossible to know the exact value of aggressive cross-selling (though I’m sure executives within the bank have it spelled out to the penny). But here are some rough calculations: Wells Fargo has about seventy million customers. In the past thirteen years, during its cross-selling mania, Wells has increased the average number of products, per customer, from about four to more than six. That means it has sold a hundred and forty million more products than it would have otherwise, transferring more of its accounts from that forty-one-dollar low end toward the thousand-dollar high end. Wells Fargo has surely made tens of billions of dollars, and likely hundreds of billions, by employing its aggressive cross-selling approach. Only two million customers are known to have been explicitly defrauded, but the fraud was clearly the result of this over-all effort. Cross-selling gained Wells Fargo enormous sums of money—as well as praise and envy—from its rivals in the banking industry. The fines against the bank are just a tiny fraction of the profits they earned. The message seems quite clear: encourage aggressive cross-selling at all costs, even if it leads to some fraud.
The basic math of financial regulation is heartbreaking, a sign of just how little effect even the harshest penalties have on the industry. The relative size of the two groups—the watchdogs and those they watch—is fundamentally lopsided. The entire budget of the C.F.P.B. is a little more than six hundred million dollars a year. Wells Fargo’s revenues are more than eighty billion dollars. And Wells is just one of thousands of banks, insurance companies, and other institutions that the C.F.P.B. is mandated to monitor.
I spoke with Kermit Schoenholtz, a former chief economist at Citibank and now a professor of banking finance at the N.Y.U. Stern School of Business, and the co-author of an essential banking textbook. He told me that, since the beginning of the Great Depression, our system of bank regulation has relied on bank self-monitoring; it’s long been clear that government banking cops could never match the resources of the banks themselves. Each fine, then, serves two purposes: to punish the wrongdoing and also to warn all banks that they will pay a stiff price if they don’t root out such activity. But he warned me, “The mechanism isn’t working.” He explained that it is incredibly easy for banks to conceal their bad behavior. One of the most shocking aspects of the Wells Fargo case is that it was so crude and blatant. It had none of the finesse of other banking frauds, such as when, for more than twenty years, bankers quietly and secretly manipulated the Libor rate for hundreds of trillions of dollars in derivative contracts and bank loans. Schoenholtz said that it is not easy—or cheap—for a large bank to monitor every one of its quarter million employees. It’s not something that senior executives are going to take on with enthusiasm unless they are forced to by a fear, deep in their gut, that they will pay a much higher price if they don’t. Bad behavior should lead to fines large enough to infuriate shareholders and cost C.E.O.s their jobs. What’s more, these executives need to know that they will face criminal prosecution when they direct or ignore criminal activity.
There is no evidence that John G. Stumpf, the C.E.O. of Wells Fargo, was involved in the scheme to defraud the bank’s customers. If bank regulation were doing its job—if he’d feared a job-threatening fine—he would have had the incentive to find out about it and stop it. What price has Stumpf paid for failing to monitor his bank? Remember: early signs of this scandal were covered in 2011, and then widely revealed in 2013. That year, Stumpf won the Euromoney Banker of the Year award. Last year, Stumpf was named Morningstar’s C.E.O. of the Year, and made nearly twenty million dollars. This year, he was reappointed to the prestigious Federal Advisory Council, a group of twelve bankers who are trusted to give guidance to the Federal Reserve Board of Governors. The Federal Reserve, of course, is the nation’s leading bank regulator.