OBSERVATIONS FROM THE FINTECH SNARK TANK
The Federal Trade Commission announced a new proposed rule to prohibit junk fees, which it defined as “hidden and bogus fees that can harm consumers and undercut honest businesses.” The FTC has estimated that these fees can cost consumers tens of billions of dollars per year in unexpected costs.
Where should the government start in its efforts to ban junk fees? Here are 5 of the the worst offenders:
5) Convenience fees. Investopedia defines this as a fee “charged by a seller when a consumer pays with an electronic payment card rather than by a standard form of payment—including cash, check, or an ACH transfer—accepted by the business.” This is nonsense—the use of debit and credit cards are the “standard” forms of payment today. With cash handling costs and the growing prevalence of check fraud, sellers should rejoice when a customer pays with a card. In fact, consumers should get a “convenience” discount when paying with an electronic payment card.
4) Restaurant living wage fees. Sometimes called a “living wage” charge or “kitchen fee,” the rationale for the fee is to pay back-of-house staff like cooks and dishwashers. Other times it’s a fee the restaurant says it uses to cover employees’ health care, or a mandatory minimum gratuity that gets split by all restaurant employees. Admirable intentions, but how can restaurant patrons know for sure the fee they’re paying actually goes to pay for health care or is split among employees?
3) Inactivity fees. Let me see if I understand this: You’re going to charge me a fee for services rendered and a fee if I don’t have any services rendered?
2) Hotel resort fees. Resorts should charge for the use of their facilities. The problem here is twofold: a) Hotels that hardly qualify as “resorts” charge the fee, and b) The fee is charged whether use the facilities or not. How can they get away with charging for something that isn’t provided? Section 5(a) of the Federal Trade Commission Act (FTC Act) (15 USC 45) prohibits ‘‘unfair or deceptive acts or practices in or affecting commerce.’’ Isn’t it unfair to charge for something that wasn’t consumed or provided?
And the #1 most offensive and onerous junk fee…
1) Ticket service charges. These charges should be the first to be attacked. At the new Sphere in Las Vegas, the service charge for a $600 ticket for a U2 concert came to $150—25% of the ticket value. The Federal Reserve is proposing to reduce interchange fees because it claims banks’ costs for card processing have declined. How much could it possibly cost StubHub to process the online sale of a ticket?
The Impact of Junk Fees
The Administration should be commended for announcing a crackdown on junk fees. But it’s playing both sides of the court. Because junk fees aren’t included in price calculations, the government’s claim that inflation is slowing may be incorrect.
The government’s own estimates of the volume of junk fees is suspect, altogether. The Consumer Financial Protection Board (CFPB) estimates that Americans pay “at least” $29 billion annually.
At $29 billion, that comes out to $112 per American adult per year, or $9.35 per month. That’s not a huge problem.
But the CFPB’s numbers (and FTC’s estimate) have to be understated.
If just 2% of restaurant and hotel revenue ($898 billion and $240 billion in 2022, respectively) came from junk fees that would total $22.8 billion, and that doesn’t include junk fees associated with utilities, cable, and telco bills, or the “convenience” fees, or surcharges, that retailers and merchants tack on to credit card payments.
Wait, What About Banking Fees?
The Administration—in particular, the CFPB—loves to lump bank overdraft fees in its discussion of junk fees. But, by its own definition, are these fees really “hidden and bogus”?
They’re not hidden. It’s hard to imagine that anyone with a checking account doesn’t know that if you try to spend more than you have, you’re going to get hit with an overdraft charge.
Are there issues with the timing of payments that causes these charge? Absolutely. But: 1) Many banks reverse these charges for good customers (especially if it happens infrequently), and 2) Fees for overdraft charges have been declining significantly in the past four years—according to Bankrate, the average overdraft fee was 25% higher in 2019 ($33.36) than it is today ($26.61).
Are they bogus? Not if you use the dictionary definition for the term, “not genuine or true; fake.” Overdraft fees are real charges for trying to spend more money than what’s in the account, and they’re a fee for a service provided—covering a payment the purchaser doesn’t have the money to pay for.
What the Government Should Do
The problem of “junk fees” are real, and the FTC and CFPB should take actions to ban them. There are, however, some things the Administration should do to truly make consumers’ lives better:
1) More precisely define—and ban—junk fees. “Hidden or bogus” is a great marketing term for these fees since it resonates with consumers’ emotions. But it’s not a great term from a legal perspective. The government should define junk fees more precisely—for example, “fees or charges for services that are not provided or not provided in connection with the product or service purchased.”
2) Audit fees. As mentioned above, do restaurant living wage fees really go to helping pay for restaurant workers’ health care costs or do hotels’ “conservation fees” really go to conservation efforts? The government should make businesses prove that the fees they collect are used for their intended purpose.
3) Ban credit card surcharges. Retailers and merchants’ efforts to allegedly recoup interchange fees is what’s really bogus here. Companies set prices for products and services based on two things: 1) cost to provide the product or service, and 2) supply and demand. If a Maserati Gran Turismo was priced solely on what it cost to make and deliver it, it wouldn’t cost $174,000. The stated price of any product already encompasses the cost of interchange. Charging for it separately is basically charging for it twice.
4) Better coordinate agency efforts. Although the CFPB was originally created to monitor and punish large banks, the agency’s more recent efforts to expand its scope and look at any company or industry impacting consumers’ financial lives is a positive direction. This direction, however, begins to overlap with the FTC’s jurisdiction, and potentially with any agency that oversees any industry. Please note that I am not advocating for the creation of another government agency.