U.S. President Joe Biden speaks about protecting consumers from unwanted fees in the East Room of the … [+]
FINTECH SNARK RESERVOIR OBSERVATIONS
The Federal Trade Commission announced a new proposed rule to ban unwanted fees, which it defines as “hidden and false charges that can harm consumers and harm honest businesses.” The FTC has estimated that these fees can cost consumers tens of billions of dollars a year in unexpected costs.
Where should the government start in its efforts to ban unwanted fees? Here are 5 of the worst offenders:
5) Convenience Fee. Investopedia defines this as a fee “charged by a seller when a consumer pays with an electronic payment card rather than a standard payment method, including cash, check, or ACH transfer, accepted by the business.” » It’s absurd: using debit and credit cards are “standard” payment methods today. With the costs of handling cash and the increasing prevalence of check fraud, sellers should rejoice when a customer pays with a card. In fact, consumers should receive a “convenience” discount when paying with an electronic payment card.
4) Restaurant living expenses. Sometimes called a “living wage” or “kitchen fee,” the purpose of these fees is to pay back-of-house staff like cooks and dishwashers. Other times, it’s a fee the restaurant says it uses to cover employee health care, or a mandatory minimum tip that’s shared among all restaurant employees. Admirable intentions, but how can restaurant customers know for sure that the fees they pay are actually going to pay for health care or are being distributed among employees?
3) Inactivity Fees. Let’s see if I understand this: you are going to charge me a fee for services rendered. And fees if no service is provided?
2) Hotel accommodation costs. Resorts should charge for the use of their facilities. The problem here is twofold: a) Hotels that are hardly considered “resorts” charge fees, and b) Fees are charged whether or not they use the facilities. How can they get away with charging for something that is not 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 hasn’t been consumed? or provided?
And the most offensive and expensive unwanted charges…
1) Ticket service fees. These accusations should be the first to be attacked. At the new Sphere in Las Vegas, the service fee for a $600 ticket to a U2 concert was $150, or 25% of the ticket value. The Federal Reserve is proposing to cut interchange fees because it claims bank card processing costs have fallen. How much could StubHub cost to process the online sale of a ticket?
The impact of unwanted fees
The administration should be commended for announcing a crackdown on unwanted fees. But it’s about playing on both ends of the field. Since unwanted fees are not included in the price calculation, the government’s claim that inflation is slowing may be incorrect.
The government’s own estimates of the volume of unwanted charges are highly suspect. The Consumer Financial Protection Board (CFPB) estimates that Americans pay “at least” $29 billion a year.
At $29 billion, that comes to $112 per American adult per year, or $9.35 per month. It is not a huge problem.
But the CFPB numbers (and the FTC estimate) duty to be Discret.
If just 2% of restaurant and hotel revenue ($898 billion and $240 billion in 2022, respectively) came from unwanted fees, that would total $22.8 billion, and that doesn’t include associated unwanted fees on utility, cable and telecommunications bills, or the “convenience” fee, or surcharge, that retailers and merchants add to credit card payments.
Wait, what about bank charges?
The Administration – particularly the CFPB – loves to lump bank overdraft fees into its discussion of junk fees. But, by their own definition, are these fees really “hidden and fake”?
They are 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’ll end up with overdraft fees.
Are there any issues with the payment schedule that are causing these fees? Absolutely. But: 1) Many banks waive these fees for good customers (especially if it happens rarely), and 2) Overdraft fees have decreased significantly over the past four years, according to The bank rateaverage overdraft fees were 25% higher in 2019 ($33.36) than they are today ($26.61).
Are they fake? Not if you use the dictionary definition of “neither genuine nor true; fake.” Overdraft fees are genuine charges for attempting to spend more money than is in the account, and they are a charge for a service provided, covering a payment for which the buyer does not doesn’t have the money to pay.
What the government should do
The problem of “junk fees” is real, and the FTC and CFPB should take action to ban them. There are, however, some things the administration should do to truly improve consumers’ lives:
1) More precisely define (and prohibit) unwanted fees. “Hidden or fake” is a great marketing term for these fees because it resonates with consumer emotions. But it is not a good term from a legal point of view. The government should more precisely define unwanted charges, such as “fees or charges for services that are not provided or are not provided in connection with the product or service purchased.”
2) Audit fees. As mentioned above, do restaurant living expenses actually go toward paying restaurant employee health costs or do hotel “conservation fees” actually go toward conservation efforts? The government should require companies to prove that the fees they collect are used for their intended purposes.
3) Ban credit card surcharges. What is really wrong here is the efforts of retailers and merchants to supposedly recoup interchange fees. Businesses set prices for products and services based on two elements: 1) the cost of providing the product or service, and 2) supply and demand. If the price of a Maserati Gran Turismo was based solely on what it costs to make and deliver it, it wouldn’t cost $174,000. The indicated price of any product Already includes the cost of interchange. Billing it separately is essentially charging 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 broaden its scope and examine any of them a company or industry impacting consumers’ financial lives is a positive direction. This guidance, however, begins to overlap with the jurisdiction of the FTC, and potentially that of any agency that oversees an industry. Please note that I am not advocate for the creation of another government agency.
