Banks Steer Clear of Risky Customers

February 6, 2014

Banks are steering clear of risky customers, says the Wall Street Journal.

  • While medical marijuana merchants or virtual-currency companies may be legal, banks are showing a hesitancy to get involved with such customers.
  • Facing ever-growing regulations and federal scrutiny, U.S. banks are unwilling to enter into arrangements with customers that could "be perceived as risky, unsavory or detrimental to the social fabric," according to Andy Schmidt, research director at CEB TowerGroup.

Industry officials have said that the potential benefits from working with these businesses are not worth the cost, citing regulatory scrutiny and additional monitoring costs.

  • Just last year, J.P. Morgan dumped 2,000 customers in an attempt to reduce its regulatory risk.
  • The bank has split from convicts as well as from individuals who have been indicted, and it has ceased doing business with some spouses of foreign leaders.
  • The firm has also stopped lending to check-cashing companies and refuses to process transactions for 500 foreign banks.

J.P. Morgan has cut ties with these clients even when there were no indications of wrongdoing. The company had to pay regulators $20 billion in 2013 to resolve compliance issues and avoid lawsuits, and it has had to put hundreds of employees to work on settling these issues.

J.P. Morgan is not alone in its decision to end these types of relationships. Bank of America began ceasing operations with payday lenders last year, and Missouri Bank & Trust Co. has stopped services with online lenders, who are increasingly under close regulatory scrutiny. Similarly, Wells Fargo and Bank of America, in addition to other large banks, do not allow credit card customers to gamble online in Delaware, Nevada or New Jersey, even though gambling is legal in those states.

Source: Robin Sidel and Andrew R. Johnson, "U.S. Banks Steer Clear of Sensitive Customers," Wall Street Journal, January 28, 2014.

 

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