The White House has declared war on so-called “junk fees,” i.e. add-on fees to transactions that increase complexity and decrease price transparency as opposed to rolling all relevant costs into one “all-in” price. Regulators such as the Consumer Financial Protection Bureau (CFPB) and Federal Trade Commission have followed with their own rules implementing that command.
But if the Biden Administration claims to be in favor of simpler pricing, why do they keep pushing regulations that will increase the use of exactly the sort of practices the White House claims to abhor?
Take for example recent legislation introduced by a group of Senators that would redesign the credit card market with the intended goal of reducing credit card processing fees. The legislation is modeled after the “Durbin Amendment” to the 2010 Dodd-Frank financial reform legislation, which imposed similar rules on debit card interchange fees, slashing allowable fees nearly in half from 50 cents per transaction to 24 cents, a reduction of 52 percent and costing banks roughly $6.6 billion to $8 billion annually in revenues.
The consequence for bank customers was disastrous as banks passed on those revenue losses to consumers by making bank accounts more expensive and pricing more complicated. As Julian Morriss, Geoffrey Manne, and I reported previously, banks eliminated debit card rewards and access to free checking plummeted in half, from 76% of bank accounts in 2009 to 38% by 2013. Meanwhile the average minimum balance required to avoid fees increased seven-fold and the average monthly maintenance fee for non-free checking doubled from about $6 per month to over $12. Other fees such as ATM and overdraft fees increased as well. Subsequent research has confirmed our findings. Air Travel Experts are already predicting the elimination of frequent flyer cards if the legislation passes.
In other words, federal meddling eliminated simple, easily-accessible free checking accounts for millions of consumers, forcing them to contend with a complicated array of higher minimum balance requirements and monthly fees as well as eliminating debit card rewards. Low income consumers, unable to meet the higher monthly minimum balance requirements and saddled with higher bank fees, were the biggest losers.
Now the same Big Box merchants who forced new bank fees on consumers are back with a scheme to impose similar mandates on credit cards. It is not that long ago that the standard credit card charged a hefty annual fee just to have a plain vanilla card. Today, by contrast, free credit cards and generous rewards and other card benefits such as dispute resolution, anti-fraud protection, and car rental insurance are taken for granted. If Washington’s central planners have their way, however, they will do the same thing to credit cards as Durbin did to debit—and consumers can expect the return of more complex pricing, annual fees, the elimination of rewards, and higher interest rates.
But that’s only part of the government’s current assault on the well-functioning credit card system. The CFPB is proposing to impose what amounts to a new $8 price control on credit card late fees, down from the current permissible level of about $41. Economic analysis by Grodzicki, et al., of prior caps on late fees finds the predictable result—an increase in the frequency of late payments, an increase in purchasing and borrowing activity by most cardholders who are less-likely to fear falling behind on payments, and higher interest rates for everyone. That higher late fees do in fact reduce the frequency of late payments also indicates that these fees are anything but “hidden” or “junk” fees. Massoud, et al., similarly found that a one standard deviation increase interest rates (273 basis points in their study) was associated with a reduction in late fees of approximately $2.13 to $6.36. Studies by the Pew Trust and others have found that restricting late fees and other fees, such as over-the-limit fees, result in higher interest rates for everyone else.
Most market-based multi-part pricing schemes are economically efficient and impose the costs of using services on those who use them. But as I recently testified to the U.S. Senate, cracking down on “junk fees” that harm consumers, such as mandatory hotel resort fees and mandatory ticket processing fees can be beneficial to consumers. So why does the Biden Administration keep pushing policies that will harm the consumers they claim to want to help?
