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Ending Junk Fees, the Most Annoying Thing in American Commerce
Cheating is pervasive in American business, epitomized by the junk fee. Finally, FTC Chair Lina Khan and CFPB Director Rohit Chopra are pushing back with rules barring hidden fees.
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Last week, I wrote up the problem of inflation, noting that people aren’t just mad at high prices, but at unfair prices. I brought up one of the most annoying features of American commerce, which is known as the junk fee. We’ve all experienced these in one form or another. You go to a hotel, and instead of being given the price quoted to you online, they add a $25 “amenity” fee, or “resort” fee, or something like that.
It’s not just hotels who charge undisclosed fees, but banks, rental car companies, landlords, live event firms, auto dealers, restaurants, phone companies, internet service firms, universities, private airports, prisons, movie theaters, credit card companies, etc. Junk fees are indeed everywhere - aircraft owners have to deal with hidden charges by Fixed Base Operators, and independent pharmacists have to put up with endless fees from pharmacy benefit managers.
Such cheating is pervasive at this point, built into the business model of firms across the economy. According to Consumer Reports, 85% of Americans “have experienced a hidden or unexpected fee for a service in the previous two years,” and 96% found them “highly annoying” and said they were paying more in hidden charges than they were five years ago. There’s even an airline-specific consulting firm, IdeaWorks, that releases regular reports cheering on the industry for increasing fees. (I’m not kidding, just browse the press release section of its website.)
Junk fees are the flip side of consolidation, because they force prices up across the board by breaking the very structure of a market and forcing even honest actors into cheating. Here’s how. The lifeblood of a market with buyers and sellers is public pricing information, because public pricing helps match buyers and sellers based on a mutually agreed upon amount. Typically, consumers will buy tickets or hotel rooms based on price comparison sites, which show a list price. An unscrupulous firm which lists a hidden fee has an advantage, since its list price will look lower than a firm without such a hidden fee. A buyer will purchase the good or service, and then end up paying a higher price when the hidden fee is added back in. But in addition, the honest firm loses a sale, and ultimately, will either start charging its own hidden fees or go out of business. Put differently, junk fees are a form of mass deception, and they turn everyone into a cheater.
Junk fees, in other words, are a low-grade form of fraud. So why, exactly, are they legal? I’m going to answer that, but it’s important to note that they may not be legal for very much longer. On Tuesday, the Chair of the Federal Trade Commission, Lina Khan, and the Director of the Consumer Financial Protection Bureau, Rohit Chopra, unveiled a series of proposed regulations to ban these fees by forcing disclosure of the total price of goods and services.
The new proposed rule from the FTC is simple. No hidden fees.
The CFPB also put out a rule in its area, requiring banks to provide basic information to consumers without charging fees, for things like checking account balances, getting a payoff amount for a loan, or obtaining account information for applications. Later this month, the CFPB will also put forward a rule letting you change bank accounts more easily, forcing banks to let you transfer your bank transaction data to another bank or financial services firm, so you can easily move banks and not have to redo all the auto-pay stuff.
The coverage of these attacks on junk fees has been uniformly positive, because, well, everyone has experience with being cheated at this point. The Today Show, the New York Times, NPR, lots of local news, covered it, and even people who despise anti-monopoly regulators, like the anchors on CNBC, offered praise.
It’s obviously a heavy foreign policy week, but junk fees are so annoying and pervasive that President Biden took time to talk up how his regulators are attacking the problem.
Banning junk fees might seem obvious - the sort of pedestrian work of competent regulators. And it is. But it also brings up a simple question. Why didn’t anyone in regulatory positions stop these fees years ago? It’s not like they are totally new. The answer is that, in the Bush, Obama, and Trump administration, regulators and enforcers believed that such cheating was just how business was done, and it would have been inappropriate to stop it. Indeed, late last year, Republican FTC Commissioner Christine Wilson disagreed with the idea of a junk fee ban, and wrote a dissent opposing it.
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Junk Fees for Thee But Not For Me
Changing that libertarian dynamic took a lot of political work, and still faces aggressive insider political backlash, with lobbyists and lawyers swarming to protect their clients’ deceptive business models. Auto dealers, the casino lobby, banks, online travel agents, national advertisers, title insurers, home and auto insurers, motorcycle dealers, credit insurers, credit unions, and fintech firms are all opposed to the crackdown on junk fees. The U.S. Chamber of Commerce claimed that an FTC ban on junk fees is an illegal use of government power, and it may sue to block the rule.
Here, for instance, is the casino lobby’s comment on why such junk fees “make for an elevated travel experience, with an attention to detail valued by guests.”
One reason you can tell these lobbyists are disingenuous is that they also hate junk fees when it’s not their industry doing the cheating. For instance, there’s Richard Hunt, the former head of the Consumer Bankers Association and a current consultant for credit card firms, who regularly criticizes Chopra in bitter and personal terms. In between tweets attacking legislation that would bring down egregiously high credit card costs, he complained about a junk fee from his auto dealer, and tagged his Senator in his tweet.
Hunt is a stalwart defender of junk fees when it comes to the people who pay his salary.
But the main assault is led by none other than the elite corporate bar. There are client alerts and big names signifying that the establishment should support junk fees. For instance, H. Rodgin Cohen of Sullivan and Cromwell, who was the most important bank lawyer during the 2008 financial crisis and recently brokered the sale of Silicon Valley Bank, recently argued that cutting credit card late fees from $30 to $8 is bad, because it could hinder “access to credit to underserved segments of the population.” In obnoxious lawyer-speak, what Cohen is saying is that if credit card companies can’t rip off poor people, then they won’t offer credit cards to poor people.
Then there’s the high dudgeon. "I am very tired of the Biden Administration’s, most notably the CFPB’s, inflammatory rhetoric about 'junk fees,'" wrote Alan Kaplinksy, the senior counsel of the big corporate law firm Ballard Spahr, before going on to describe how terrible, vague, and power hungry the government is for trying to stop a hotel from charging you a hidden $25 resort fee. Kaplinksy’s claim to fame is that he’s the lawyer who figured out you could get rid of the ability of a consumer to go to court by using what’s called a pre-dispute arbitration provision in a contract.
Taking on junk fees is attacking the entire rotten legal profession, who culturally are offended that someone might suggest that the people themselves have economic rights. Many lawyers made their careers fighting the CFPB on behalf of firms who want to cheat customers, so expect more pugilistic rhetoric in the corridors of the American Bar Association.
We The People Hate Junk Fees
With all the organized money and corporate bar anger arrayed against them, enforcers used the only force available to them, which is public support. Last year, the FTC and CFPB asked the public for thoughts on banning junk fees, which is part of moving the work of governing from technocrats to the people at large. Tens of thousands of people responded, almost all of them angry at firms like Ticketmaster. Here are a few of the comments I reviewed.
“A ‘Convenience Fee’ to pay my rent online, when they ONLY accept rent payments online.” - Anonymous
“It’s not fair to the American public to be robbed every time someone wants to enjoy themselves at a concert, a ball game, or any event they may like to attend.” - Jeffrey Cass
“This has to stop! How long have we been paying extra for nothing?” - Jordan Schoener
“Ticketmaster. How come when I book a $250 ticket it can come out to $350?” - Christian Nielson
“Hotels in Las Vegas add required junk fees to their reservations which obfuscate the real prices and make nightly room rate comparisons impossible.” - Zachary Palmese
“Break up the monopoly known as ‘TicketMaster’ and give us back our money that they stole.” - Anonymous
“We‘re mistreated financially as often as possible as US citizens and we’ve had enough. We, the people, make this country go. Added fees have become a norm we can’t avoid and don’t deserve.” - Ashley Ludwig
There were also random businesses and unions, such as the Annual International Ballet Festival of Miami and Cuban Classical Ballet of Miami, and the Aircraft Owners and Pilots Association, who applauded the crackdown on hidden fees. Basically, everyone hates being cheated.
Living in the Real World
Talking about monopolies is a bit tricky, because a corporation is an abstraction. And firms slide behind slick public relations, or have some argument that makes it a bit difficult to figure out why some services got worse. But in late 2022, when Ticketmaster couldn’t sell Taylor Swift tickets, or charged egregious fees while doing so, the public, in unison, pointed at the company and screamed “MONOPOLY!” Much of the focus was on hidden fees, which push up prices dramatically.
Normally, or at least in my lifetime, such public anger means little, as governments don’t always respond to civic frustration. But we’ve made a lot of progress, at least in some areas. There’s an antitrust investigation into Ticketmaster, which is ongoing. But challenging individual firms with market power isn’t the only route to addressing political economy problems. Regulators can also write rules to push corporations into competing based on quality and price instead of who is better at cheating. They can ban things like junk fees. And right now, that’s what they are doing.
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