The following was sent to the Bloomington Wednesday:
FOR IMMEDIATE RELEASE
October 26, 2022
The President’s Initiative on Junk Fees and Related Pricing Practices
The Biden-Harris Administration is taking action on junk fees that hurt Americans’ pocketbooks and the economy.
By: Brian Deese, Neale Mahoney, Tim Wu
Last month, at a meeting of the White House Competition Council, President Biden called on all agencies to reduce or eliminate hidden fees, charges, and add-ons for everything from banking services to cable and internet bills to airline and concert tickets.
These so called “junk fees” are not just an irritant – they can weaken market competition, raise costs for consumers and businesses, and hit the most vulnerable Americans the hardest.
Today, the Consumer Financial Protection Bureau (CFPB) took new actions to effectively eliminate billions in banking fees – building on other Biden-Harris Administration actions that are already saving consumers billions more.
On the occasion of today’s announcement, this blog provides context on what junk fees are, why they are a concern, and what the Biden-Harris Administration is doing to address them.
Defining “junk” fees
There is nothing wrong with a firm charging reasonable add-on fees for additional products or services. In the interests of customization, firms should be free to charge more to add mushrooms to your pizza or to upgrade you to a hotel room with an ocean view. However, in recent years we’ve seen a proliferation of “junk fees” – a category of fees that serve a different purpose. They can be defined as fees designed either to confuse or deceive consumers or to take advantage of lock-in or other forms of situational market power.
Academic research and agency experience suggest the following fees and fee practices fall within this category:
- Mandatory fees that often hide the full price. Some sellers publish a low price and then add mandatory fees later, at the “back-end” of the buying process or when a consumer tries to terminate the service. As the research shows, by hiding the full price, this practice can lead consumers to pay more than they would otherwise, and it also makes it hard for consumers to comparison shop. An example is the “service fees” added to the cost of a ticket to a concert or sporting event.
- Surprise fees that consumers learn about after purchase. Surprise fees that consumers do not expect – and which may not be mandatory – similarly make it hard to comparison shop and can burden household finances. Surprise hospital bills from out-of-network doctors at in-network hospitals and airline “family seating fees” are prominent examples.
- Exploitative or predatory fees. Excessive fees that target consumers who have limited alternative options – because they are locked into a product or service, or are otherwise economically vulnerable – can likewise impose a financial burden. As the CFPB explains, a sign of exploitative fees is that they “far exceed the marginal cost of the service they purport to cover.” Bank overdraft fees, which greatly exceed the bank’s cost of credit, and surprise “termination fees” are leading examples.
- Fraudulent fees. Some fees involve outright fraud or misrepresentations on the part of the seller. An example is advertising a “no fee” bank account that in practice carries significant fees.
The economic issues with “junk fees”
Markets work when firms compete on an even playing field – displaying prices to consumers in a fair and transparent manner. Mandatory hidden fees risk obscuring the full price, making it harder for consumers to comparison shop – to choose their preferred product and the best deal. These fees can also create an uneven playing field for businesses, making firms that price in a fair and transparent manner seem more expensive than their rivals.
Surprise termination and cancellation fees can harm free and fair competition by increasing switching costs – locking consumers into sub-standard products. Larger switching costs also make it harder for new entrants and more innovative firms to win over market share – reducing market dynamism.
Actions that limit or disallow junk fees have the potential to create more efficient markets by requiring firms to compete on the merits by offering a lower (actual) price or a better product or service. In cases where the junk fee is unjustified, banning the practice outright can reduce firms’ incentives to engage in “exploitative innovation” – developing new junk fees rather than improving the actual quality of the product.
Junk Fees Hit Consumers – and Businesses – in the Pocketbook
Fees account for tens of billions of dollars in revenue – a substantial source of revenue in many industries, including transportation, banking, internet, and hospitality. A sampling of some fee categories where junk fees appear to make up significant fee revenue include:
|Credit card late payment fees:||$12 billion in 2020 (CFPB estimate)|
|Bank overdraft and non-sufficient funds (NSF) fees:||$15.5 billion in 2019 (CFPB estimate)|
|Hotel resort fees:||$2.93 billion in 2018 (NYU estimate)|
|Airline baggage and change fees:||$5.97 billion in 2021 (DOT statistics)|
|Cable hidden fees:||$28 billion in 2019 (Consumer Reports estimate)|
Studies also show that these fees can artificially inflate total prices. In highly competitive markets where firms earn razor-thin margins, junk fees may not raise the total amount consumers pay. The reason is that firms will face competitive pressure to offset junk fee revenue with a lower upfront price. However, many markets are not highly competitive, and in these settings, junk fees can cause American consumers to pay more.
A large body of evidence shows that mandatory fees charged at the back-end of the buying process – sometimes referred to as “drip” prices – along with other types of junk fees make it harder to comparison shop. This causes consumers to underestimate the total price of what they’re buying, often increasing total payments. Among other findings:
- An experimental study by Rasch et al. (2020) found that drip pricing raised firm profits and resulted in consumers paying more than they would if firms were required to charge a single all-inclusive price up front. A series of experimental studies by Santana et al. (2020) similarly found that drip prices caused consumers to pick products with higher total costs.
- An empirical study by Ellison and Ellison (2009) of online sales of computer parts found that sellers used hidden fees to obfuscate actual prices and avoid price competition.
- A study by Agarwal et al. (2014) found that fee regulation can lower total costs if the fee is unclear – as is the case with drip pricing and other hidden fees – and the market is not perfectly competitive.
- An empirical paper by Agarwal et al. (2015) found that regulation of credit card fees saved consumers $11.9 billion per year in borrowing costs, with the largest impact on the lowest credit score borrowers.
Confusing or coercive fee practices risk harming not only consumers, but also small and medium-sized businesses, which can be targeted by the same kind of fee schemes – including surprise fees and unexpected cancellation charges. For example, common carrier industries – industries that provide essential services to dependent businesses – like ocean carriers sometimes use hidden and confusing fee practices to muddy the prices paid. Some shippers that rely on ocean carriers to ship their goods to market report that unpredictable fees added to a base price more than doubled the total price they paid for ocean shipping, and these costs are often ultimately passed along to consumers.
Junk Fees Hit Low-Income Households and People of Color the Hardest
While the extra costs of junk fees affect everyone, they disproportionately impact lower income households and people of color. For example:
- A CFPB study found that consumers in low-income and majority-Black neighborhoods paid disproportionately more in credit card late fees.
- A survey by the Financial Health Network found low- to moderate-income households incurred overdraft fees at nearly twice the rate of high-income households and that Black and Hispanic households were charged overdraft fees at substantially higher rates than white households.
- A 2017 report by the National Consumer Law Center found that Hispanic car buyers paid more in costly add-ons – such as service contracts, insurance, and window etching – than non-Hispanic car buyers.
The Biden-Harris Administration is Taking Action on Junk Fees
In response to President Biden’s call to action, all Competition Council federal agencies are looking for ways to reduce or lower junk fees. While in some cases more work is needed to identify and understand unjustified practices, federal agencies are acting now in places where there is a compelling case to reduce or eliminate fees – and taking comment and engaging stakeholders where greater transparency and data will help to improve regulatory approaches going forward. To date, the Administration has already taken a number of actions that will save consumers and businesses billions of dollars:
- Eliminating unfair banking fees. Today, the CFPB issued guidance explaining that two junk fee practices are unfair and unlawful – effectively banning both. First, the CFPB is making clear that surprise overdraft fees are unlawful. These are fees charged for overdrawing a checking account even though at the time the account owner made a purchase, the bank’s website or ATM terminal showed the customer that they had sufficient available funds for the purchase. Second, the CFPB is making clear that surprise depositor fees are unlawful. These are fees charged to customers who deposit someone else’s bounced check, penalizing the victim. Together, these actions will save consumers more than $1 billion annually.
- Additional CFPB actions on bank and credit card fees. The CFPB is developing rules and guidance on other fees charged by banks and credit card companies. These fees cost consumers more than $24 billion a year combined, with the biggest impacts on low-income Americans. This builds on work CFPB began last year that successfully encouraged 15 of the nation’s twenty largest banks to drop the use of NSF charges, and Citi and Capital One ended the use overdraft fees altogether. As a result, the overall level of overdraft fees is already on track to be down 20% in 2022 from 2019 levels – $3 billion less compared to pre-pandemic.
- Taking aim at bad junk fee practices that span industries. Last week, the Federal Trade Commission (FTC) voted to launch a rulemaking process that would broadly reduce junk fee practices across the economy, including for event ticketing, hotels, funeral homes, and any other industry that uses mandatory fees. The rulemaking would address practices such as charging consumers fees they never consented to or charging mandatory fees with little or no added value, like hotel resort fees or event ticket processing fees. This action is an important step towards a future rule that would give the FTC additional information and enforcement tools to take action and seek penalties against companies adopting unfair and deceptive junk fees. This action builds upon the FTC’s work bringing multiple enforcement actions challenging junk fees across a variety of industries and returning money to injured consumers. In the auto industry, the FTC charged dealerships like Passport Auto and Napleton for tacking on junk fees for unwanted add-ons and other items. FTC took action against Benefytt Technologies to halt its practice of charging people separate fees for add-on health products that people didn’t know about or want. In First American Payment Systems, the FTC charged that the payment processing company trapped small businesses with surprise early termination fees.
- Restricting Junk Fees Charged by Auto Dealers. This June, the Federal Trade Commission (FTC) issued a proposed rule that would restrict junk fee practices by car dealers that are costly and frustrating for consumers. The rule, if finalized, would (1) ban bait-and-switch claims by prohibiting dealers from making deceptive advertising claims to lure in prospective car buyers; (2) prohibit fraudulent add-on products (such as “nitrogen filled” tires that contain no more nitrogen than normal air); (3) prevent dealers from charging consumers surprise fees for an add-on without their clear, written consent; and (4) mandate upfront disclosure of costs and conditions by requiring dealers to make disclosures to consumers like proving a “true offering price” for a vehicle.
- Requiring Airlines and Airline Search Sites to Disclose Fees Up Front. In September, the Department of Transportation (DOT) proposed a rule that would protect travelers by ensuring they know the full price of airline tickets before they buy. The rule, if finalized as proposed, will require airlines and online search sites to disclose up front – while you are comparison shopping – any fees to sit next to your child, for baggage, and for changes or cancellations. The proposal seeks to provide customers the information they need to choose the actual best deal, preventing surprise fees that add up quickly and prevent competition on the basis of price. This builds on previous actions the DOT has recently taken, including issuing proposed rules that would require airlines to refund fees for checked bags that are significantly delayed and for services not actually provided (like broken WiFi), and to require refunds for delayed and cancelled flights.
- Requiring Broadband Nutrition Labels. The Federal Communications Commission (FCC) has issued proposed rules that would, if finalized as proposed, require internet companies to display a standardized “Broadband Nutrition Label” that discloses their monthly prices, fees, and internet speeds – so customers can see which company is cheapest and companies will have to compete for business. The FCC anticipates completing this rulemaking by the end of this year.
- Reducing the Cost of Shipping Goods. Congress responded to President Biden’s call to crack down on excessive fees in ocean shipping by passing the bipartisan Ocean Shipping Reform Act. The Federal Maritime Commission, which is responsible for implementing the law, recently released a proposed rule that proposes to bring more clarity, structure, and punctuality to ocean shipping fee billing practices.
 In its recent Advance Notice of Proposed Rulemaking, the Federal Trade Commission defines “junk fees” as “unfair or deceptive fees that are charged for goods or services that have little or no added value to the consumer, including goods or services that consumers would reasonably assume to be included within the overall advertised price; the term also encompasses ‘hidden fees,’ which are fees for goods or services that are deceptive or unfair, including because they are disclosed only at a later stage in the consumer’s purchasing process or not at all, whether or not the fees are described as corresponding to goods or services that have independent value to the consumer.”
FORWARDING FROM THE CONSUMER FINANCIAL PROTECTION BUREAU:
– – – – – – –
FOR IMMEDIATE RELEASE
October 26, 2022
|CFPB Issues Guidance to Help Banks Avoid Charging Illegal Junk Fees on Deposit Accounts|
|Washington, D.C. – Today, the Consumer Financial Protection Bureau (CFPB) issued guidance about two junk fee practices that are likely unfair and unlawful under existing law. The first, surprise overdraft fees, includes overdraft fees charged when consumers had enough money in their account to cover a debit charge at the time the bank authorizes it. The second is the practice of indiscriminately charging depositor fees to every person who deposits a check that bounces. The penalty is an unexpected shock to depositors who thought they were increasing their funds.“Americans are willing to pay for legitimate services at a competitive price, but are frustrated when they are hit with junk fees for unexpected or unwanted services that have no value to them,” said CFPB Director Rohit Chopra. “We are providing guidance on existing law that will help law-abiding businesses seeking to fairly compete and the families they serve.”Overdraft and depositor fees likely violate the Consumer Financial Protection Act prohibition on unfair practices when consumers cannot reasonably avoid them. Today’s Consumer Financial Protection Circular on surprise overdraft fees and the CFPB’s compliance bulletin on surprise depositor fees lay out when a financial institution’s back-end penalties likely break the law.Surprise Depositor FeesWhen a consumer deposits a check that bounces, banks sometimes charge a fee to the depositor, usually in the range of $10 to $19. However, a person trying to deposit a check has no idea or control over whether the check will clear, and sometimes, that person is the victim of check fraud. In fact, there are many reasons deposited checks can bounce, and the most common reason is that the check originator does not have enough money available in their account. Charging a fee to the depositor penalizes the person who could not anticipate the check would bounce, while doing nothing to deter the originator from writing bad checks.The bulletin explains that indiscriminately charging these depositor fees, regardless of circumstances, likely violates the Consumer Financial Protection Act. Financial institutions can generally stay on the right side of the law when they employ more tailored fee policies that charge depositor fees only in situations where a depositor could have avoided the fee, such as when a depositor repeatedly deposits bad checks from the same originator.Surprise Overdraft FeesAn overdraft fee can become a surprise fee when the customer doesn’t reasonably expect their actions to incur an overdraft fee. For instance, even if a person closely monitors their account balances and carefully manages their spending to avoid overdraft fees, they can easily incur penalties when financial institutions employ processes that are unintelligible or manipulative.Today’s Consumer Financial Protection Circular explains that when financial institutions charge surprise overdraft fees, sometimes as much as $36, they may be breaking the law. The circular provides some examples of potentially unlawful surprise overdraft fees, including charging penalties on purchases made with a positive balance. These overdraft fees occur when a bank displays that a customer has sufficient available funds to complete a debit card purchase at the time of the transaction, but the consumer is later charged an overdraft fee. Often, the financial institution relies on complex back-office practices to justify charging the fee. For instance, after the bank allows one debit card transaction when there is sufficient money in the account, it nonetheless charges a fee on that transaction later because of intervening transactions.In September 2022, the CFPB took action against Regions Bank for charging surprise overdraft fees known as authorized positive fees. As early as 2015 the CFPB, as well as other federal regulators, including the Federal Reserve, began cautioning financial institutions against charging certain types of authorized positive fees, such as the ones used by Regions to unlawfully penalize customers. Regions is required to, among other consequences, reimburse consumers all the funds it unlawfully charged since August 2018 and pay a $50 million penalty.Today’s Consumer Financial Protection Circular on surprise overdraft fees and its bulletin on surprise deposited item fees are just the latest announcements as part of the CFPB’s junk fee initiative, one of many efforts across the federal government to increase competition and reduce unnecessary financial burdens on American families.Junk Fee InitiativeIn January 2022, the CFPB launched an initiative to scrutinize back-end junk fees that cost Americans billions of dollars. Tens of thousands of people responded to a CFPB Request for Information with their stories and complaints about unnecessary fees in banking. Since then, the CFPB has taken action to constrain “pay-to-pay” fees, and has announced a rulemaking proceeding on credit card late fees. In the last year, the CFPB has also published several research reports on overdraft fees and an analysis of college banking products.The CFPB has observed that financial institutions have started to compete more when it comes to fees. Earlier this year multiple banks announced they were eliminating overdraft fees or updating their policies to be more consumer friendly. And, in recent months, multiple large banks announced that they are eliminating non-sufficient fund fees on their checking accounts. The CFPB estimates that these changes mean $3 billion in savings for consumers.|