The Junk Economics of ‘Junk-Fee’ Politics Biden’s regulatory assault on common business practices will reduce competition and harm low-income Americans.
President Biden is from the federal government, and his bureaucracy is here to help you. That’s the political subtext of all the President’s promises in his State of the Union address, notably his vow to remove what he calls “junk fees” from the economy. But the results are likely to harm the very people he claims to help.
There’s no dispute that customers shouldn’t be charged without their consent for products they don’t want. Nor that businesses should disclose add-on fees before consumers sign a contract or make a purchase. But Mr. Biden’s regulators are targeting common business practices that aren’t deceptive or unfair.
In recent years, more banks have begun offering free checking accounts and other services. To cover their costs, they charge fees to customers who overdraw their accounts. This is now a target of the Consumer Financial Protection Bureau (CFPB), which has issued guidance prohibiting “surprise” overdraft fees on debit transactions.
For example, an individual with $100 in his account might incur an overdraft fee if he has an $80 monthly cable bill automatically withdrawn and then uses his debit card to buy a $90 pair of sneakers. CFPB director Rohit Chopra calls this a “surprise” fee. But anyone who tracks his bank balance would know he doesn’t have enough money to buy the sneakers.
Banning such fees could cause banks to restrict credit to lower-income customers who are more likely to overdraw their accounts. The same goes for the CFPB’s proposal last week that would effectively cap credit-card late fees at $8. This might cause card issuers to shun low-income customers and push more to pay-day lenders that charge higher interest.
There’s no such thing as a free financial product. If regulators limit one source of revenue, businesses will find another to cover their costs. That is one lesson from the Dodd-Frank Act, which limited debit-card fees that banks charge retailers for using their network. As a result, banks increased overdraft fees.
Federal Trade Commission Chair Lina Khan is tag-teaming with Mr. Chopra on the Biden “junk fee” plan. Last summer she launched a rule-making that would ban auto dealers from adding fees for extended warranties, service and maintenance plans, and theft protection devices, among other things that aren’t included in an advertised price.
“Consumers who select and travel to dealerships based on an advertised offer, only to learn late in the process (if at all) that the advertised offer does not apply, have often spent hours trying to purchase a car,” the FTC says. But because customers often choose not to buy additional products, advertising an all-in price would be deceptive.
The FTC is also pursuing a broader rule to regulate “unnecessary charges for worthless, free, or fake products or services.” But businesses that want to stay in business don’t add fees for worthless services—they let customers pay more for services that are valuable to them. This lets consumers compare prices offered by different businesses for different features.
In a useful dissent, FTC commissioner Christine Wilson asked if government-mandated “all-in pricing” would lead to less price competition or force consumers “to pay for goods and services they may not want or need?” Excellent questions.
The CFPB and FTC can already target businesses that use deceptive advertising or defraud customers. But issuing blanket bans on fees and unbundled prices will make markets less competitive, not more. It will also result in higher prices or fewer services for lower-income Americans. Too bad citizens can’t sue the government for deceptive advertising.
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