The 2016 Wells Fargo financial scandal profoundly eroded public trust in traditional banking institutions. It simultaneously fuelled a notable shift toward fintech lenders among homebuyers, according to a study conducted by the University of California, Davis. The research reveals that fallout from the scandal—one of the most notorious in the American banking sector since the 2008 financial crisis—played a pivotal role in altering consumer behaviour, not due to financial incentives, but due to a collapse in institutional trust.

The study, titled “Trust as an Entry Barrier: Evidence from FinTech Adoption,” was recently published in the Journal of Financial Economics and authored by Keer Yang, an assistant professor at the UC Davis Graduate School of Management with a focus on finance and financial technology. Drawing on a broad data set that spans nearly a decade, Yang’s research establishes a strong correlation between public exposure to the Wells Fargo scandal and the subsequent adoption of digital mortgage lending platforms. According to Yang, “Geographic areas with larger exposures to the Wells Fargo scandal increased the probability of consumers choosing fintech for their mortgage lender,” underscoring how reputational damage can open the door for disruptive financial innovation.

Fintech—short for financial technology—encompasses digital platforms that allow individuals and businesses to access banking and other financial services online. These services have proliferated in the past decade. While fintech’s appeal often lies in its convenience and technological edge, Yang’s research suggests that it was a breakdown in trust, rather than a difference in financial offerings, that spurred consumers to switch. Indeed, the study found that the costs of borrowing, including interest rates and fees for 30-year fixed-rate mortgages, remained relatively stable across banks and fintech firms in the aftermath of the scandal. “Therefore, it is trust, not the interest rate, that affects the borrower’s probability of choosing a fintech lender,” Yang concluded.

The Wells Fargo scandal itself became a symbol of systemic malpractice within the traditional banking industry. Beginning in 2002 and stretching until 2016, bank employees—under intense pressure to meet aggressive sales quotas—allegedly opened millions of unauthorised accounts and imposed unjustified fees on customers. Though investigative reporting by the Los Angeles Times brought some of these practices to light in 2013, public awareness and regulatory response surged in 2016 when Wells Fargo was fined $185 million by federal authorities, followed by a staggering $3 billion penalty imposed later by the U.S. government. These revelations sparked widespread outrage and prompted scrutiny into longstanding banking practices that many consumers had previously taken for granted.

In assessing the impact of the scandal, Yang’s study relied on diverse and robust sources of data, including Gallup surveys measuring public trust in banking, Google Trends search volumes related to banking scandals, and regional newspaper coverage of the Wells Fargo controversy. These were combined with deposit and mortgage loan figures from both traditional banks and fintech firms, providing a comprehensive view of consumer behaviour between 2012 and 2021. The findings paint a clear picture: in regions where Wells Fargo had a substantial presence, consumer migration to fintech mortgage providers increased by an average of 4% post-2016. This behavioural shift represents a considerable acceleration from the pre-scandal fintech market share of 2% in 2010, which grew to 8% by the time of the scandal’s eruption.

Interestingly, while the scandal significantly influenced mortgage lending preferences, it had only a marginal effect on traditional bank deposits. Yang attributes this to the perception of security provided by federal deposit insurance, which may have reassured depositors even as they sought alternatives for other financial products. Nonetheless, the research suggests that while deposit accounts may remain stable, other financial services—particularly those that require greater consumer discretion and trust, such as mortgages—are more susceptible to reputational risk and competitive disruption.

Ultimately, this study contributes to the growing body of literature that examines how trust serves as both a competitive advantage and a barrier to entry within the financial sector. By illustrating how a breach in ethical conduct by a dominant bank catalysed growth for its fintech competitors, Yang underscores the fragile nature of consumer loyalty and the profound implications that misconduct can have for the broader financial ecosystem. The case of Wells Fargo serves not only as a cautionary tale but also as a demonstration of how technology-driven alternatives can swiftly gain traction when traditional players falter.

More information: Keer Yang, Trust as an entry barrier: Evidence from FinTech adoption, Journal of Financial Economics. DOI: 10.1016/j.jfineco.2025.104062

Journal information: Journal of Financial Economics Provided by University of California – Davis