Question: Why Do Incentives Matter When It Comes To Financial Products?
Our students need to understand the role of incentives before they purchase any financial product (or any product for that matter). Whether they are purchasing a new or used car, getting a credit card, opening a checking account, or buying a stock, they need to understand that the person facilitating this transaction may be acting in their own interests rather the interests of the consumer.
As the banking industry has consolidated into a handful of national banks (think Bank of America, Wells Fargo, JP Morgan Chase, U.S. Bank), the promise has always been that these companies can continue to grow by getting their customers to buy additional products or services. This concept of cross-selling a credit card or mortgage to a checking account customer has become the banking mantra and anyone who has stopped by a branch in the past few years has likely seen this first-hand at the teller window (“Is there anything else that I can help you with today, such as open a wealth management account with us?”).
This 2013 article from the LA Times (and a more recent video about a lawsuit being brought by Los Angeles) provides a rare look inside the sales operations at a bank branch for the one of the largest and most successful banking behemoths:
The bank expects staffers to sell at least four financial products to 80% of their customers, employees said. But top Wells Fargo executives exhort employees to shoot for the “Great 8″ — an average of eight financial products per household.
The tracking starts each morning. Managers are asked not only to meet but to exceed daily quotas passed down by regional bosses. Branch managers are expected to commit to 120% of the daily quotas, according to the former Pacific Northwest branch manager, who said results were reviewed at day’s end on a conference call with managers from across the region.
What are examples of abuses that arose from this sales driven culture?
“To meet quotas, employees have opened unneeded accounts for customers, ordered credit cards without customers’ permission and forged client signatures on paperwork. Some employees begged family members to open ghost accounts.”
Have students read the LA Times article and pair up to answer the following questions:
- What are techniques this bank used to sell additional products to consumers? Why is cross-selling so important to the large banks?
- What are steps that you (as a consumer) can take to protect yourself from such sales tactics?
- Why did the bankers behave like this? What incentives were in place to cause this behavior to occur?
- Do you think it was more of an individual employee issue or a corporate culture issue?
About the Author
Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.