Last week, the Federal Trade Commission unveiled a proposal backed by the Biden administration aimed at banning “junk fees” ― the hidden charges that companies in many industries heavily rely on when it comes to their own bottom lines.
“Folks are tired of being taken advantage of and played for suckers,” President Joe Biden said during a press conference. “Unfair fees known as junk fees — those hidden charges that companies sneak into your bill to make you pay more because they can, simply because they can, charges that are taking real money out of the pockets of American families — these junk fees can add hundreds of dollars weighing down family budgets, making it harder to pay family bills.”
If the FTC’s directive is officially approved, it will significantly alter the way many businesses are conducted, in ways that will likely trickle down to affect Americans’ wallets.
Below, we offer a breakdown of the possible changes.
What are “junk fees”?
“Junk fees, often dubbed as ‘hidden fees,’ are those ambiguous charges that companies tack onto a product or service, often without clear disclosure,” explained James Pollard, founder of the Advisor Coach, a company that offers services to financial advisers.
The practice isn’t limited to a specific industry or business. Examples abound, including the “processing” and “convenience” fees that usually get added to the price of a concert or an event’s base price; the baggage-related and seat selection attached costs that pop up as you’re about to purchase a plane ticket; and the “resort fees” associated with just about any hotel stay.
“Imagine you are booking a two-night hotel stay for $250 per night and, when you’re just about to pay, you notice the total is over $600,” said David Klyman, a financial strategist at Klyman Financial. “You are basically being charged an extra $100 that you didn’t know about in the first place and, at that point, you’re so far into it that you’re just going to book.”
Above all, though, it appears that these hidden charges have been most readily used by bank-related entities, actually accounting for a hefty portion of their yearly profits.
“While they may seem harmless, it is worth pointing out that a vast majority of revenues banks make from deposit accounts comes from back-end penalty fees for overdrafts, monthly checking service fees and ATM fees,” said Andrew Wang, a financial adviser at Runnymede Capital Management, Inc. “In 2019, the average cost of $30 to $35 from overdraft and non-sufficient funds fees added up to over $15 billion in bank revenues.”
What is the FTC’s current stance on junk fees?
The FTC, a government agency dedicated to the enforcement of consumer protection laws to prevent fraud and unfair business practices, has been trying to mitigate the junk fee problem for some time.
Biden has worked on a number of initiatives aimed at helping the average American consumer, and this is only his latest effort.
According to Wang, the FTC has received “more than 12,000 comments from its proceeding last year, requesting public input on unfair and deceptive practices and fees,” and the agency is finally acting on that feedback.
Given both the FTC’s and Biden’s desire to carry on this path, the latest proposal could become a reality if it makes it through Congress.
What does the proposal entail?
“If this proposed rule is finalized as proposed, the FTC would have the power to impose financial penalties on companies that don’t disclose their full upfront price, and secure refunds for customers who have been defrauded by companies charging hidden fees,” Biden said during his press conference. He also signaled that sellers might be limited in how much they can charge for goods.
According to Klyman, officials “want to eliminate some junk fees and be able to punish those who don’t follow the new law.”
It seems like the administration and the FTC are looking for more transparency all around, while seeking the power to administer penalties to address the problem even further.
“Businesses would be required to present a ‘total price’ that includes all required fees that they give customers,” Wang explained. “If finalized, the proposed rule would give the FTC more enforcement powers to curb the use of junk fees, enabling the FTC to seek civil penalties of up to $50,120 per violation and to more easily seek refunds for harmed consumers.”
What are critics of the proposal saying?
If the new rule becomes a reality, it’s likely that plenty of Americans will be happy about it. However, there are some detractors making a variety of different points.
According to Pollard, for example, some critics contend that consumers bear the responsibility of actually reading the fine print of whatever document they are signing or service they are subscribing to.
The major opposing argument, though, concerns competition. Critics argue that penalties and lower margins stemming from the elimination of extra charges “could lead to fewer choices for consumers and make the economy less competitive,” Wang explained.
For his part, Klyman believes that the eradication of these hidden fees might hurt small businesses the most.
“Let’s say you own an Airbnb and, all of a sudden, the government is telling you you can’t charge these added costs that were part of your revenue,” he posited. “But Airbnb still requires you to pay them a certain amount of money that’s now going to come out of your pocket. So, Airbnb is still making the revenue, just off of you instead of your customer. Big companies can definitely absorb this change, especially if simply increasing prices in general.”
It’s also possible that, if no longer able to rely on these additional charges, companies will start simply start raising the cost of their goods and services to compensate for their losses — a possibility that some people point to when criticizing the latest effort.
What are the remaining steps for the proposal to become a law?
As Pollard noted, the Senate and the House of Representatives would need to agree to the change, after which it would head to Biden’s desk to be signed into law.
At the moment, the FTC is seeking public input. In about 60 days, the proposal will be published in the Federal Register, and those in the know believe that “the agency will make a push to finalize the rule in advance of the 2024 election,” Wang said.
What, exactly, will I be saving money on if junk fees are eliminated?
Just about every type of financial service and product you might ever think of spending money on would be affected by the proposed change.
Some of the junk fees featured in the proposal include the following, according to Wang:
- Service or convenience charges for event tickets
- Resort fees at hotels
- Out-of-network ATM fees
- Late fees for credit cards
- Termination fees for phone or internet services
- Document preparation fees for financial transactions
- Airline family seating fees
- Checking account overdraft fees
- Online convenience fees
- Excessive bank fees to obtain information about customers’ own accounts
Of course, the proposal doesn’t solely seek the elimination of these added charges, but rather an upfront disclosure about them, which means prices wouldn’t necessarily go down across the board.
Still, being able to actually know the cost of a Beyoncé concert pass or a plane ticket as soon as we start looking for them would make the buying process that much more convenient and transparent.
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