The real reason Wells Fargo employees resorted to fraud

Oh boy, has Wells Fargo angered the masses.

The bank's employees, we now know, opened as many as two million bank and credit card accounts on behalf of its customers, without their authorization. The scandal has the institution, and its CEO John Stumpf, in hot water with consumer groups, ambulance-chasing lawyers, prosecutors, regulators, politicians — especially politicians. After all, greedy banksters just might be the one group in America that's even more unpopular than Congress. And so, Wells Fargo's CEO has been dragged in front of various congressional committees to answer for his bank's sins.

This looks like a classic scandal of financial greed ran amok, like all those post-2008 stories about banks selling ticking time bomb mortgages to unsuspecting borrowers, and then selling them to other banks that packaged those into ticking time bomb synthetic securities and then sold those to other banks until the entire financial system was like a powder keg.

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But there's something strange about this particular scandal. It's obvious why a greedy, unscrupulous banker would sell a bad financial product to an unsuspecting borrower. But why a bank would want to create fake customer accounts is less clear. After all, a fake account with no money in it doesn't do a bank much good. In fact, the bank's senior executives didn't want their employees to start these fake accounts. As The New York Times reported, Wells Fargo even held a two-day ethics workshop in 2014 explicitly telling their employees not to do that.

So what's going on? The problem here can't just be chalked up to finance run amok. It's a deeper problem, one that has to do with human nature.

As Financial Times columnist John Gapper points out, Wells Fargo was known in the financial industry as the "king of cross-sell." Cross-selling is a straightforward-enough strategy: You have a customer who enjoys your product A. Why not also sell him your product B? That makes complete sense. Cross-selling is particularly lucrative in retail banking, because the most expensive part of the customer relationship is getting a client as a customer. So the idea of selling as many products as you can to your existing customers is particularly lucrative. And, again, there's nothing wrong with this in principle. It makes sense for the company, and the customer can always choose not to buy.

At Wells Fargo, employees apparently had a target of selling eight products to each customer. Why eight? "The answer is, it rhymed with 'great,' Stumpf reportedly wrote in an annual report. "Perhaps our new cheer should be: 'Let's go again, for ten!'"

This strategy created what The Wall Street Journal called a "high pressure sales culture" at Wells Fargo. Employees were given impossible sales quotas to reach, and berated or even fired for not meeting them. And so they cut corners.

This is a parable for any business, even those that have nothing to do with finance. It's an extreme version of a very basic — perhaps the most fundamental — quandary of management: How do you measure, evaluate, reward, and punish employees?

"Good work" can never be reduced to any one metric, or set of metrics. It always involves a series of choices and tradeoffs. If you give people impossible, or contradictory goals, then something will give. Salespeople will resort to fraud, or aggressive sales tactics that will hurt your brand ("Managers suggested to employees that they hunt for sales prospects at bus stops and retirement homes," reports The Wall Street Journal), or something else. If, let's say, a news website gives employees pageview targets, they will churn out clickbait trash. But if the website doesn't care at all about pageviews, it will go bankrupt. There is an example like this in every industry. And if the tactic gets too extreme, yes, people will either burn out or resort to fraud.

Financial regulation cannot prevent this kind of scandal — forging signatures is already illegal. At the root of this problem is human nature: Mutually exclusive, high-pressure demands will cause people to break. How do you motivate people to not only check boxes, but actually do a good job? How do you motivate an employee to really take heart in their work, and give it their best? How do you inculcate a culture where the bank genuinely cares about the customer, with the belief that this will rebound to its long-term advantage?

"Man is neither angel nor beast," the French thinker Blaise Pascal wrote, "but he who would turn him into angel will turn him into a beast." Humans have high aspirations, and at the same time they are greedy and weak and unprincipled.