Would you trust a stranger to keep your financial secrets? That's exactly what customers do every time they pick up the phone to call their bank, brokerage, or credit card company and talk with a customer service representative.
Obviously such companies must follow strict protocol when handling sensitive consumer data. But how much oversight can a company really have when the people whom they entrust with customer information aren't even in the same country?
Please Hold While We Pilfer Your Data
The absence of strict data privacy laws and enforcement structures in countries popular for outsourcing raises concerns about the security of our personal information in the hands of contractors abroad. These concerns came to a head in March when England's Sunday Times published the results of an undercover investigation that caught corrupt Indian call-center workers selling customers' personal information to criminals and marketing firms.
Despite rising concerns about data security under the management of foreign contractors, Bank of America (BAC) is the latest bank to decide to outsource call-center jobs -- a move that puts customers' personal information in the hands of contractors abroad. A spokesman for the bank claims it has "employees and operations where we can ensure that we best serve our customers and clients."
But is this move really in the best interest of consumers?
It's Hard to Enforce Upstanding Behavior
Bank of America is outsourcing its call-center jobs to the Philippines, not India. However, there are reasons to fear similar violations in Philippine call centers.
While the deputy majority leader of the country's House of Representatives, Roman Romulo, is pushing for a law requiring businesses to comply with international privacy standards, this law is not yet in effect. And even if it is, our worries aren't over.
If the law is passed, successful enforcement will require effective regulatory structures with sufficient authority and funding. And because it takes time for businesses to set up new compliance measures necessary to meet new standards, it's unlikely that Philippine contractors will meet these legal standards immediately after they are passed.
Bank of America isn't the only bank to outsource customer service to the Philippines. It's following the lead of Wells Fargo (WFC), Citigroup (C), and JPMorgan Chase (JPM).
The 5 Bank Stocks Facing the Biggest Legal Risks
How Offshoring Customer Service Puts Your Financial Data at Risk
With 10,000 lawsuits against them, you knew they'd be on the list somewhere. JPMorgan estimates it faces up to $3.315 billion in litigation after taxes, beyond what it has already paid out or reserved against. That adds up to 8.8% of the $37.612 billion JPMorgan is expected to earn in 2012-2013.
In 2011, JPMorgan's noninterest expense included $3.2 billion of litigation expense, mostly for mortgage-related matters, compared with $5.7 billion of litigation expense in 2010, according to Nomura's report
Citigroup estimates it is on the hook for up to $2.6 billion in litigation after taxes, beyond what it has already paid out or reserved against. That adds up to 9.9% of the $26.364 billion Citigroup is expected to earn in 2012-2013.
Citigroup faces a variety of regulatory inquiries and class action lawsuits related to its mortgage origination practices. The private lawsuits will not be included in a National Mortgage Settlement, reached last month with 49 state attorneys general and the federal government. Bank of America (BAC), JPMorgan, Wells Fargo (WFC) and Ally Financial, the former GMAC, were also part of the settlement.
Bank of America estimates it faces up to $2.34 billion in litigation expenses after taxes, beyond what it has already paid out or reserved against. That would equate to 10.9% of the $21.455 billion the bank is expected to earn in 2012-2013. The bank faces lawsuits related to mortgage originations and servicing, as well as for alleged failure to disclose its knowledge of ballooning losses at Merrill Lynch ahead of its eventual acquisition of that company.
The $2.34 billion figure, however applies only to "those matters where an estimate is possible," according to the bank's annual 10-K filing with the Securities and Exchange Commission.
Regions Financial estimates it faces up to $221 million in additional litigation costs after taxes, or 12.9% of estimated $1.707 billion in 2012-2013 earnings.
Regions is also on the hook for any litigation related to its Morgan Keegan brokerage unit, which it agreed to sell to Raymond James Financial (RJF) on Jan. 11.
Synovus faces just $39 million in potential litigation costs after taxes, above what it has written down or reserved against. However, that equates to 14.5% of the bank's estimated $270 million in 2012-2013 earnings.
As is the case with Bank of America, however, Synovus's estimates relate only to "those legal matters where [the company] is able to estimate a range of reasonably possible losses," according to its 10-K.
While B of A claims that it is moving "employees and operations where we can ensure that we best serve our customers and clients," it is likely that this move will impose costs on consumers in the form of lower-quality data security and customer service. Also, it's unclear that this move will do anything to help consumers unless the bank passes its cost savings on to consumers.
Time will tell if this occurs.
Motley Fool contributor M. Joy Hayes, Ph.D., is the Principal at ethics consulting firm Courageous Ethics. She owns shares of Bank of America. Follow @JoyofEthics on Twitter. The Motley Fool owns shares of Citigroup, Bank of America, JPMorgan Chase, and Wells Fargo, and has created a covered strangle position in Wells Fargo. Motley Fool newsletter services have recommended buying shares of Wells Fargo.