The time is out of joint for Wells Fargo & Co. (WFC), which has hit the headlines for the wrong reasons yet again. It has been ordered to pay $203 million in order to recompense customers who had sued the company for charging improper overdraft fees. This ruling was given by the U.S. District Court of Northern California yesterday.
The court has held Wells Fargo responsible for manipulating transaction entries to generate greater overdraft fees. Transactions were re-sequenced by the bank so that the largest withdrawals were deducted first instead of being cleared in the order in which they were received. As a result, customers’ balances dwindled faster, resulting in a larger number of ‘overdrawn’ transactions, each of which then became chargeable.
Wells Fargo was also alleged of keeping back this manipulation while circulating a façade of phony disclosure. It is to be noted that during the period between 2005 and 2007, Wells Fargo generated over $1.4 billion in overdraft fees in California only.
This compensation order is, however, only applicable to consumers in California. A separate class action lawsuit for overdraft fees has been moved in Florida against a number of banks including Wells Fargo, Citibank, part of Citigroup Inc. (C) and JPMorgan Chase & Co. (JPM).
An overdraft occurs when withdrawals from a bank account exceed the available balance. In such a case, banks charge fees for the overdrawn transactions from the account holders. With a rise in debit card usage, overdraft fees have become an important revenue driver for banks.
Previously, if there were insufficient funds, checks were returned and the account holders had to bear a charge for that. However, banks found it easier to generate revenues through overdraft fees by allowing customers to overdraw their accounts by debit purchases, ATMs, or through any other electronic payment gateways.
However, in many a case, customers had not been fully aware of the details of such fees and came to know only when they had already been charged. This has been one of the major complaints made by customers against banks since the onset of the recent financial crisis.
Nevertheless, with the passing of the new regulation, banks would not be able to charge such hefty fees without informing the account holders. In fact, as par the new federal laws, the customer’s permission is required prior to allowing several overdrafts to be allowed. This would result in revenue challenges for the banks.
Wells Fargo alone estimates the amendments to the overdraft rules and its own voluntary policy changes to lower its after-tax fee revenue in third quarter by $225 million and in the fourth quarter by $275 million. U.S. Bancorp (USB) also expects the overdraft legislation to reduce revenue by $170 million to $220 million in the second half of the year.
The court has held Wells Fargo responsible for manipulating transaction entries to generate greater overdraft fees. Transactions were re-sequenced by the bank so that the largest withdrawals were deducted first instead of being cleared in the order in which they were received. As a result, customers’ balances dwindled faster, resulting in a larger number of ‘overdrawn’ transactions, each of which then became chargeable.
Wells Fargo was also alleged of keeping back this manipulation while circulating a façade of phony disclosure. It is to be noted that during the period between 2005 and 2007, Wells Fargo generated over $1.4 billion in overdraft fees in California only.
This compensation order is, however, only applicable to consumers in California. A separate class action lawsuit for overdraft fees has been moved in Florida against a number of banks including Wells Fargo, Citibank, part of Citigroup Inc. (C) and JPMorgan Chase & Co. (JPM).
An overdraft occurs when withdrawals from a bank account exceed the available balance. In such a case, banks charge fees for the overdrawn transactions from the account holders. With a rise in debit card usage, overdraft fees have become an important revenue driver for banks.
Previously, if there were insufficient funds, checks were returned and the account holders had to bear a charge for that. However, banks found it easier to generate revenues through overdraft fees by allowing customers to overdraw their accounts by debit purchases, ATMs, or through any other electronic payment gateways.
However, in many a case, customers had not been fully aware of the details of such fees and came to know only when they had already been charged. This has been one of the major complaints made by customers against banks since the onset of the recent financial crisis.
Nevertheless, with the passing of the new regulation, banks would not be able to charge such hefty fees without informing the account holders. In fact, as par the new federal laws, the customer’s permission is required prior to allowing several overdrafts to be allowed. This would result in revenue challenges for the banks.
Wells Fargo alone estimates the amendments to the overdraft rules and its own voluntary policy changes to lower its after-tax fee revenue in third quarter by $225 million and in the fourth quarter by $275 million. U.S. Bancorp (USB) also expects the overdraft legislation to reduce revenue by $170 million to $220 million in the second half of the year.
We believe that the recent financial regulations will have a negative impact on both the top line and the bottom line of Wells Fargo, with restricted revenues and increased compliance and litigation costs. However, economic improvement and the company’s strategic efforts would help it pull through in the upcoming quarters.
Wells Fargo is currently rated as Zacks #3 Rank (Hold), implying no clear directional pressure on the stocks over the next one to three months. The stock also has a Neutral recommendation from us in the long term.
CITIGROUP INC (C): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis Report
US BANCORP (USB): Free Stock Analysis Report
WELLS FARGO-NEW (WFC): Free Stock Analysis Report
Zacks Investment Research
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