By Ray Birch
SOLON, Ohio—Can what happened at Wells Fargo—where employee misconduct led to enormous fines and harm to account holders—occur at credit unions?
Two analysts say that is not impossible, and are urging CUs to pay attention to the issues that created Wells Fargo’s problems, including a badly structured incentive program that pressured employees to sell eight accounts per customer, poor staff training, a weak corporate culture, and the CEO himself.
As CUToday.info has extensively reported, regulators have fined Wells Fargo $185 million for the bank creating more than one-million fraudulent accounts.
Ron Schmidt, with CBS Certified Public Accountants, and Greg Inman, COO at the $760-million Neighbors FCU in Baton Rouge, La., examined the issues at Wells Fargo and suggested ways banks and credit unions should address their operations to avoid a similar problem.
“There seems to be a conundrum that some bank employees are challenged with,” said Schmidt, following allegations from employees who worked at other large banks that the problems at Wells Fargo extend to many more big banks. “The conundrum is, who do they serve—the customer, the bank, or themselves? There is such pressure on these employees to do their job that in some ways they have been set up for failure—set up to cheat.”
Where Is The Focus?
Inman said the issue at Wells Fargo is the bank’s focus.
“I think what it boils down to with Wells Fargo is where is the focus? Is it on profits or people—and it appears, pretty clearly, to be on profits,” said Inman.
As for Wells Fargo’s suggestion that the more than 5,000 employees who have been fired were acting independently and without direction from the bank to create the phony accounts and push products to customers that they did not to need, Inman added, “Either management is not paying attention or management is involved, and neither is a good scenario. Management has to be aware, have its eyes on the business, its feet on the ground, heads up paying attention to what is going on.”
He noted that’s true of any financial institution.
Ron Schmidt
Schmidt said that banks need to begin paying close attention to the “landscape,” and ask if they are challenging employees to go against their own values and ethics, and against the values of the financial institution.
Pressure from bosses on front-line staff aside, the issues at Wells Fargo likely also revolve around lack of training, not giving employees—often tellers—the skills they need to be effective cross sellers, said Schmidt.
Schmidt used the example of a right fielder on a Little League baseball team, the position where teams generally place their weakest player. The strongest player, said Schmidt, is typically the shortstop—a talented athlete who has a lot of different skills.
Tough Sales Goals
Schmidt asserted that at banks like Wells Fargo, where staff face tough sales goals, management may not be providing the training programs to make sure that the less-skilled staff obtain the abilities they need to do their jobs.
“If we have a person who can’t play shortstop, we have to realize that,” said Schmidt. “So if we expect those employees who should be playing right field to come in and play shortstop, are we providing the right training for them? That is really important.”
Schmidt also believes that training should go further, with mentoring programs.
“And who do these employees model their behavior after? In sports, kids learn more from watching other kids play, rather than from their coaches,” asserted Schmidt. “So when it comes to tellers, what do you have in place in your culture that allows a person to properly grow, to be effective sellers and encourages them to always do the right thing?”
Schmidt and Inman stressed that an ethical, consumer-focused culture is driven down from the top of the organization.
“Everyone is culpable. Everyone at the top, everyone at the management level. The leaders need self-awareness of what they are doing to their players. It does not take much effort to ask employees what they are concerned about,” said Schmidt. “And if one of the things they say is that there is too much pressure to cross sell, you have to put two and two together and say where will this culture take us?”
What Will Drive Change?
But to really drive change at financial institutions where sales pressure is an issue, the CEO must be accountable for the company’s culture, said Schmidt. That sentiment was also shared by several senators in the recent Wells Fargo hearing in which the bank’s CEO, John Stumpf, was grilled.
“If we, as a society, say we will hold the CEO accountable for all the actions of the employees, what will happen is the CEOs will get off their butts and down to shop floor,” said Schmidt. “They will ask tellers what they are concerned about and what can be done to help them do their jobs better.”
Schmidt insisted that banks should not only evaluate how well teams are meeting their sales goals but also how well they are serving customers—giving equal weight to both sides.
Inman said sales incentive programs structures must be balanced.
“You have to have balanced incentives,” said Inman, who chairs the CUNA Operations Sales & Service Council. “Balanced in terms of the value they provide to the financial institution and to the member or the customer. If they provide value to one and not the other, there tends to be a negative impact on the institution. And then there is the third component, the employee. Incentive programs have to benefit all three parties to be effective.”
Inman said that if a program is weighted too heavily in favor of the account holder or employee, the FI can’t afford to run that program long term.
“I have seen that happen, where a product sale earns the credit union $50 but the institution is paying out $50 to $75 to the employees,” said Inman. “That is a losing proposition.”
Simply A Target Goal
At Neighbors FCU, Inman said they have set employee incentives for credit insurance cross sales, for example, to cover 60% of total loan dollars with credit insurance.
“We don’t have these goals set at 90%,” said Inman. “We set them at 60%, which we feel simply serves as a target for staff and rewards them for keeping focused on this goal. We are not covering more than 10% of our employee payroll in incentive dollars. There are not enough incentives available to make staff aggressive, just enough to make them pay attention. In the 13 years I have worked here we have never had to terminate someone for not meeting a cross-sales goal.”
Greg Inman
Inman believes banks and credit unions get in trouble when they create incentive plans that dangle too much money in front of staff, which can create an environment in which unethical behavior might develop.
“I have seen instances at other financial institutions where a sales person has a low base and then high commission,” said Inman, who added that structure only works if controls are in pace, such as limiting how much a person can make in incentives as a percentage of their overall pay.
Inman and Schmidt do not think CUs are immune from problems similar to those of Wells Fargo. Asked that as credit unions have gotten larger, could more aggressive sales cultures emerge, Inman responded, “That’s possible.”
“There are pressures of managing a credit union today that did not exist 10 to 15 years ago. Look at the margins we are running credit unions on,” he said. “Look at the operating expense ratios . . . For example, a checking account used to be an ATM card and checks. Now there is also debit, online banking, bill pay, mobile, and we don’t pass any of those costs onto members.”
No Way To Know
Schmidt said he has no way to know if aggressive sales programs, where employees feel undue pressure, are in place at some credit unions today.
“I think the first thing we need to do as an industry is ask that question,” said Schmidt, who often writes on ethical issues for CUToday.info. “Is this problem among credit unions today? I don’t know. But the Wells Fargo story should serve as a wake-up call to every credit union, a reminder to talk to their people. Get out of the ivory tower. If we talked to tellers at three credit unions today and asked if they feel pressure to sell, one might say yes.”
Schmidt added that staff at all financial institutions, at all levels, should be held to the highest standards of conduct, as are doctors when they take the Hippocratic Oath.
“It’s something we should think about in the financial services business—taking an oath to not harm our customers or our members,” said Schmidt.