FinTech News
Study: Wells Fargo Scandal Helped Drive FinTech Adoption
A newly-released study from the University of California Davis finds that a scandal at a major American bank may have contributed to the rise of FinTech lenders.
About the Study’s Findings:
According to a new study, the financial scandal involving Wells Fargo pushed some consumers toward financial technology platforms. The paper, titled “Trust as an Entry Barrier: Evidence from FinTech Adoption,” was authored by UC Davis Graduate School of Management assistant professor Keer Yang and looked at how alternative finance options grew amid the banking industry fallout. Specifically, Yang focused on customers who choose FinTechs for mortgage lending.
In 2020, Wells Fargo was fined $3 billion after officials alleged that bank employees opened unwanted accounts for millions of customers without their consent in a bid to meet sales goals. These practices are reported to have taken place starting in 2002 and, while some stories on the scandal surfaced as early as 2013, the government suggests they continued until 2016. At the time, Deputy Assistant Attorney General Michael D. Granston said, “When companies cheat to compete, they harm customers and other competitors. This settlement holds Wells Fargo accountable for tolerating fraudulent conduct that is remarkable both for its duration and scope, and for its blatant disregard of customer’s private information.”
As the study notes, in 2010, FinTechs had a 2% market share among mortgage lenders. However, by 2016 when the Wells Fargo scandal erupted, that increased to 8%. Beyond that, the study found that, in areas where Wells Fargo had branches, consumers were 4% more likely to use non-bank lenders since 2016. Yang also points out that the difference in interest rates (for a 30-year fixed-rate mortgage) between banks and FinTechs didn’t change after 2016, further suggesting that the shift was trust-related.
What They’re Saying:
Commenting on the study’s findings, Yang stated, “My analysis further shows that the erosion of trust in banks relative to other financial institutions is the most likely channel through which the exposure to the Wells Fargo scandal affects FinTech adoption.”
My Thoughts:
I’m a bit conflicted with this study as, while I largely agree with its findings, I don’t know that mortgage lending is really the right vertical to look at. Instead, I’d think that people moving their checking and savings to FinTechs would be more prevalent — although the press release for the study explicitly states that “the scandal had a minimal effect on bank deposits.”
Meanwhile, if we’re talking about trust, I have to imagine that FinTech has taken a hit in recent years. Although I don’t have all of the data that Yang does to back up my assertion, I feel as though the Synapse-Evolve Bank & Trust debacle was a big black eye for the industry and will have negative impacts on the perception of FinTech for years to come.
In any case, if you’re curious to learn more, you can read the entire paper here.
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