This article has been co-published with the San Antonio Current.
Few companies can match USAA's stellar reputation, gained over a century of offering financial products to military members. But behind the scenes, the San Antonio bank and insurer is navigating a minefield of its own making.
USAA's banking arm has grown its customer base for years, all while failing to make the investments needed to keep both its regulators and some decades-long customers happy, according to a joint investigation by American Banker and the San Antonio Current.
A series of regulatory penalties hasn't sparked enough internal change. Neither has the reshuffling of key leaders, the latest move being the upcoming retirement of CEO Wayne Peacock. Another problem: nonexistent profits at USAA's bank, which has turned to layoffs to cut costs.
The list of regulatory problems in the banking division is varied. Regulators have demanded overhauls of the bank's technology and information security protections, plus its efforts to prevent money laundering. They've punished the bank for charging military members more interest than federal law allows. And they've failed USAA twice in a row on an exam that measures how well banks serve communities.
"Independently, these various violations could be understood, but collectively, they show a pattern that raises concerns," said Mark Williams, a Boston University finance professor and a former bank supervisor at the Federal Reserve. "There's something more fundamental."
This article is based on interviews with more than a dozen lawyers, analysts and former regulators; interviews with nine USAA customers; interviews with three former compliance employees at the company; and a review of data USAA has filed with its regulators.
The nine customers — or members, as USAA calls them — said the company they long trusted seems to have lost its way, as personalized customer service has shifted to unreliable automated systems.
"It just doesn't feel special anymore. It just feels like another insurance company," said Jeffrey Withee, a former Marine lieutenant colonel who has been a USAA member for almost 30 years.
Another USAA member, who has been with the enterprise since the 1960s, expressed disappointment over learning of the bank's regulatory penalties in the newspaper, rather than from the company itself. The person, who declined to be named due to identity-theft concerns, said bank security issues are important and warrant transparency with members.
"I'd like to know what's going on, because I haven't heard anything specific," the customer said. "I want them to tell me what happened and what they're doing to fix it."
Michael Moran, USAA's interim bank president, said in an interview that the bank is continuing to "strengthen our risk and compliance capabilities." The steps include upgrading its technologies, improving internal processes, increasing training and hiring an experienced pool of new employees.
"While I realize there's more work to do on this front, we have made significant progress," Moran said, pointing to greatly improved risk management in "several key areas that previously we had identified as needing attention."
'I don't want to leave'
USAA's biggest strength is that
But there are signs that frustrations are rising. Last year, consumers filed 417 complaints to the Consumer Financial Protection Bureau over USAA's checking and savings accounts, up from 150 in 2018. The 178% increase significantly outpaced the 135% uptick in complaints by customers of all banks and credit unions, according to CFPB data. Consumer complaints have risen as the industry
In a statement, a USAA spokesperson said the company's employees take "every member concern seriously and work to address each one." He also noted that complaints are "rare," considering the bank has more than 9 million members who conduct billions of transactions every year.
"Serving members with excellence couldn't be more front and center for how we do business here at USAA," Moran, the interim bank president, said in the interview.
Even so, some customers have severed their ties with USAA's bank, its insurance company or both. Some have begrudgingly kept their insurance but have opted against doing business with the bank — limiting its ability to get those customers' deposits or lend to them. Others have stuck with USAA's full suite of products, frustrated by its customer service but clinging to memories of help from USAA when they were stationed at faraway military bases.
Withee remembers the "care and attention that they took" after his car got totaled years ago. He also recalls how in 2018, USAA's windshield repair partner showed up at a rented beach house and fixed his cracked window.
But his latest windshield replacement took 18 months to complete. He says his friends who switched away from USAA insurance saved money. And when he calls customer service, he finds he can rarely get his problem resolved easily.
"I don't want to leave," Withee said, explaining that there's a "special place in my heart" for USAA.
He stayed with USAA after writing a stern letter to the CEO and getting a call back from his office. But he's been shopping around for other insurers, since USAA has made him "feel like a number."
"If I'm going to be a number, I'm going to be a number for less," Withee said.
If Withee heads elsewhere, he expects his kids to follow suit. Severing those ties would break a tradition among USAA customers: passing on their membership to the next generation.
A 'sea of telephoning'
A group of 25 Army officers started USAA in 1922 after a meeting in downtown San Antonio's Gunter Hotel. Members of the group were tired of being dropped by other insurers due to the frequent moves required by their military service.
Over the decades, USAA steadily picked up members, first expanding to include other branches of the military and then adding homeowners insurance and life insurance in the 1960s and banking services in the 1980s.
After 1996, when the company allowed enlisted military personnel rather than just officers to join, its membership jumped substantially. Its customer base skyrocketed again in 2009, when the business again expanded its membership criteria. Today, individuals are eligible to join USAA if they currently serve in the U.S. military; if they've ever honorably served; or if they are family members, including grandchildren, of people who have served.
The challenges of adding enlisted military members to USAA's customer base went beyond sheer numbers. Those personnel earn less money than the officers on which USAA built its business, and many are young, financially inexperienced and susceptible to a unique set of challenges.
Withee, the former Marine, said he welcomed the addition of enlisted members to USAA's ranks, even if it meant higher costs for officers.
"It might be slightly more expensive for some of us, but it's better for all of us," he said.
But the membership expansions have also brought a shift away from easy customer service, Withee added, pointing to what he described as a "sea of telephoning," as he gets bounced between different customer representatives.
Another USAA member, who's banked with the company for nearly 30 years, noted a shift away from what was once a "very, very intimate customer service model." Now, there's a "call bank of people that I've got to fight through" to get on the phone with someone who can make a decision, said this person, who declined to speak publicly about his banking relationship.
He said he's a fan of USAA's "awesome" online banking tools. But he's often spent more than an hour on the phone with USAA, particularly when trying to arrange banking affairs for his father. The frustrations have prompted him to slowly move his banking business elsewhere, he said.
As USAA grew, it became a major fixture in San Antonio. More than half of the firm's 37,000 employees work in Alamo City, most at a sprawling North Side campus that has more office space than the Pentagon. The facility includes multiple cafeterias, coffee shops and wellness clinics, along with jogging trails, basketball courts and other fitness amenities.
USAA has also expanded its footprint elsewhere. In 2021, it opened an office in the banking hub of Charlotte, North Carolina, which is home to experienced bankers whom USAA can hire to address its regulatory issues.
Earlier this year,
'Fire drill after fire drill'
The bigger change is happening in USAA's executive ranks. In August, Peacock said he would retire in 2025 after about five years leading the company. That tenure was consistent with how long he and his wife envisioned he'd be in the role, he wrote in a letter to employees.
But key leaders under Peacock have also left in recent months — a reshuffling that suggests fresh faces were seen as necessary to complete USAA's intended overhaul. Recent departures include
The extent of the shakeup is a classic sign of a "bank that has significant issues" and can't seem to fix its problems with regulators, said Williams, the former bank supervisor who's now at Boston University.
In a statement, the company said it has a "deep bench of highly qualified senior leaders to continue USAA's legacy of exceptional service."
"Leadership change is a natural occurrence in any large, dynamic organization," the company said. "Each situation is unique, as individuals leave to pursue other opportunities and as USAA adapts, which at times means adding new talent to meet the evolving needs of its membership."
The turnover has put pressure on employees in USAA's compliance department, according to three former compliance employees who spoke on condition of anonymity. The division — tasked with making sure USAA doesn't violate banking laws and repairs its regulatory standing — has suffered from an exodus of frustrated employees.
One former employee recalled being "underwater almost the entire time," with meetings from sunup to sundown, yet seemingly making little progress.
"We were drained. It was just fire drill after fire drill," this person said.
There was "no cohesiveness" in USAA's compliance department, a second former employee said, recalling initiatives that "were either falling through the cracks or just getting roadblocked."
A third former compliance employee recalled USAA as a "bureaucratic nightmare," with late nights spent on compiling reports that were "very redundant" and little openness to making processes more efficient.
In a statement, USAA said the company's goal is "to always be a great place to work."
"We encourage open dialogue across the enterprise, and we continue to take time to listen to, and act on, employee feedback," the company said.
Clifford Rossi, a risk management expert who teaches at the University of Maryland, said he's hopeful that new leadership will finally bring about an overhaul and "reinvigorate the bank."
"They've got a great reputation. Their heritage is stellar," said Rossi, a former chief risk officer at Citigroup's consumer lending division. "Providing services to military veterans and their families, it doesn't get any better than that. So in the actual management of the bank, there's something fundamentally going on to have these repeat compliance issues."
'America's good bank'
In the years after the 2008 financial crash, many looked to USAA Federal Savings Bank as a gem in the tarnished banking industry. A
But even as USAA ballooned in size — accepting more money from depositors — it failed to build the kinds of safeguards that regulators expect from bigger banks, several experts said. And those expectations started getting tougher after the crisis, as regulators implemented new rules to make banks safer, and the brand-new Consumer Financial Protection Bureau investigated potential wrongdoing in the industry.
It took several years, but the much-larger USAA eventually came into the sights of bank regulators and faced a series of crackdowns.
The string of bad news started in 2019, when the CFPB fined USAA $3.5 million over errors in customer payments and for reopening some customers' checking accounts without their consent.
USAA's main federal bank regulator, the Office of the Comptroller of the Currency, would soon issue an order finding widespread failures at the bank. The regulator flagged ineffective audits, failures in complying with consumer protection rules and shortcomings in USAA's information technology systems.
In 2020, the OCC fined USAA's bank $85 million over those violations. USAA
A particularly stinging rebuke came in 2022, when regulators fined USAA $140 million over the bank's weak protections against criminals laundering money.
"As its customer base and revenue grew in recent years, USAA … willfully failed to ensure that its compliance program kept pace, resulting in millions of dollars in suspicious transactions flowing through the U.S. financial system without appropriate reporting," Himamauli Das, the acting director of the Treasury Department's Financial Crimes Enforcement Network, said at the time.
The bank received "ample notice and opportunity to remediate" its issues but failed to do so, Das said.
'A fundamental breakdown'
Peacock has long acknowledged that USAA's bank did "not sufficiently invest in the capabilities and expertise necessary to meet regulatory requirements." His yet-to-be-named successor as CEO will be tasked with implementing the long-needed reforms and making them stick.
Two recent security-related disclosures were small, but they nonetheless pointed to continued struggles. Last year, USAA said a data breach led to unauthorized individuals accessing some members' personal information,
The company is due to undergo another examination under the Community Reinvestment Act, a law that looks to ensure banks adequately serve their communities and lower-income customers.
Most banks pass their CRA exams without a problem. USAA has failed twice in a row, a rare occurrence for a bank with $110 billion of assets, which puts it among the 40 largest banks in the country.
Though USAA received high marks elsewhere in its exam, the two consecutive failures were automatically triggered by separate legal violations.
During its 2020 exam, regulators found violations of laws that limit how much interest lenders can charge to service members, a failure that stemmed from inadequate compliance systems. They also found some cases of USAA wrongfully repossessing borrowers' vehicles. A class-action lawsuit over the interest charges emerged, and USAA
In its next exam, released in 2023, USAA again would have received a passing grade, but regulators found 6,477 violations of a law guarding against deceptive practices in consumer lending. The exam report said the bank failed to "provide promised interest rate discounts" on auto loans.
The CRA failures point to "a fundamental breakdown" at USAA, said Adam Rust, the director of financial services at the Consumer Federation of America.
"What's especially shameful about it is that they're serving service members who deserve better," Rust said.
In a statement, Wildermuth, the USAA spokesman, said the product that caused problems in the latest CRA exam was discontinued in 2020 and the bank received solid marks otherwise.
"We remain focused on serving USAA members with excellence and consistent with applicable laws and regulations," Wildermuth said. "USAA has a 100-year legacy of helping to build strong communities — both our military communities and the communities in which we live and work."
Not 'earning anything'
Adding to USAA's troubles is the fact that its bank has struggled to make money since 2020, turning a once-reliable profit machine into an albatross.
Leading up to the COVID-19 pandemic, USAA's main banking subsidiary was making about $1 billion in annual pretax profits. The reliable earnings stream helped "offset volatility" in USAA's property insurance business, where devastating wildfires or hurricanes can unexpectedly cut into profits, according to a research note from S&P Global Ratings.
But the bank reported pretax losses of $391 million in 2020 and $463 million in 2021. Its expenses surged as the company spent more on hiring and technology to fix its regulatory issues.
Higher expenses collided with less revenue from USAA's credit card and auto loans — as consumers found themselves with more cash thanks to COVID-era savings and stimulus funds. Fewer loans meant that USAA collected less interest.
One-time sales of assets in 2022 helped USAA's bank briefly return to profitability, but it reported a pretax loss of $398 million in 2023.
This year isn't looking too much better. Through the first nine months of the year, the bank has recorded only $92 million in pretax earnings — a far cry from the hundreds of millions it used to rake in.
"The bank isn't earning anything to speak of," said Todd Baker, managing principal at Broadmoor Consulting and a lecturer at Columbia University.
USAA's bread-and-butter insurance business remains solid. But if the profitability struggles of its bank persist, the result could be a "long-term weakening of USAA's diversified earnings stream and competitive position," the S&P analysts wrote.
Though regulatory troubles have hurt the company's bottom line, USAA also made some poorly timed investments in 2020 and 2021, when interest rates were at rock bottom.
Rather than hanging onto its cash, USAA sunk a large chunk of money into mortgage-backed securities. Homeowners who bought their houses in 2020 and 2021 locked in ultra-low interest payments, but USAA took the other side of that bet.
While USAA is making money every time those homeowners make their mortgage payments, its income stream would be far bigger if the company had waited until interest rates went up and the mortgage-backed securities started paying far more.
What's worse, USAA's portfolio has fallen in value, since the value of its low-paying securities declined when newer mortgage-backed securities started paying more. The problem should fix itself over time, particularly if interest rates fall sharply again soon.
But for now, there's a higher risk that USAA's holding company will have to pump cash into its struggling bank, according to the S&P analysts, though they said such an infusion is still unlikely.
More setbacks with USAA's regulators also represent a risk, S&P noted, since such pitfalls could prompt the ratings agency to downgrade its view of the company. A downgrade would signal to USAA's bond investors that the company is less creditworthy, potentially raising borrowing costs on debt that USAA issues to finance its operations.
Moran, USAA's interim bank president, pointed to the bank's improved earnings and its "exceptionally strong" net interest margin — which measures the difference between what USAA makes on interest and what it pays its depositors. That could bode well for better earnings as USAA members spend more money on their credit cards and turn to the company for auto loans.
And Moran pointed to the company's "deep relationships with our members" as a key asset.
"Our financial strength and commitment to service are absolutely unwavering, and we will continue to be there for our members whenever they need us and however they need us," Moran said.
'Sure didn't feel personal'
Unlike other banks of its size, and even many smaller banks across the country, USAA's stock is privately held. If the stock was publicly traded on Wall Street, it would face "immense pressure" from shareholders seeking a rebound in profits, said Williams, the Boston University professor.
Absent a stock chart, one gauge of USAA's long-term performance is its ability to keep customers happy.
And by that measure, publicly available data suggests there's reason to be optimistic. USAA customers "continue to be extremely satisfied" with their banking experience overall, Jim Miller, who leads J.D. Power's financial services division, said in an emailed statement. USAA has also consistently ranked well in J.D. Power's insurance studies.
But Army veteran John Hathaway has noticed a difference from 14 years ago, when he joined USAA. Back in 2010, another home insurer had demanded Hathaway buy additional coverage since his house was thought to be in a flood plain. County records showed otherwise, and USAA pulled records to verify that he didn't need additional coverage.
"They actually did the research," Hathaway said. "It made me feel like they saw me as a person and not just a customer."
The experience was markedly different earlier this year, when Hathaway made a claim on behalf of his father, a fellow USAA member. When a storm caused roof damage to a rental home his father owned, USAA dispatched an adjuster working under contract.
Hathaway found the adjuster uncommunicative and worried that USAA wasn't likely to cover all the damage. Compounding the stress, the home's tenants were peppering Hathaway with questions about how quickly the repairs would be done. He didn't get answers to any of his questions until USAA sent an automated voicemail days later, telling him how much the company was prepared to pay.
"At that point, it sure didn't feel personal," Hathaway said.
Hathaway experienced additional frustration with the company's automated phone systems while trying to take care of his father's affairs. And the news about the bank's regulatory fines gives him pause.
While Hathaway is not in a hurry to expand his relationship with USAA, he plans to stick with his USAA insurance policy, and he still carries one of the company's credit cards. Despite his reservations, he worries about the kind of service he'd get from another provider.
"It's not because I love USAA," he said. "I'm just worried that if I switch insurers, I'll end up getting screwed."
