Junk Fees Hit Consumers – and Businesses – in the Pocketbook
Fees account for tens of billions of dollars in revenue – a substantial source of revenue in many industries, including transportation, banking, internet, and hospitality. A sampling of some fee categories where junk fees appear to make up significant fee revenue include:
Credit card late payment fees: | $12 billion in 2020 (CFPB estimate) |
Bank overdraft and non-sufficient funds (NSF) fees: | $15.5 billion in 2019 (CFPB estimate) |
(NSF) fees: Hotel resort fees: |
$2.93 billion in 2018 (NYU estimate) |
Airline baggage and change fees: | $5.97 billion in 2021 (DOT statistics) |
Cable hidden fees: | $28 billion in 2019 (Consumer Reports estimate) |
Studies also show that these fees can artificially inflate total prices. In highly competitive markets where firms earn razor-thin margins, junk fees may not raise the total amount consumers pay. The reason is that firms will face competitive pressure to offset junk fee revenue with a lower upfront price. However, many markets are not highly competitive, and in these settings, junk fees can cause American consumers to pay more.
A large body of evidence shows that mandatory fees charged at the back-end of the buying process – sometimes referred to as “drip” prices – along with other types of junk fees make it harder to comparison shop. This causes consumers to underestimate the total price of what they’re buying, often increasing total payments. Among other findings:
- An experimental study by Rasch et al. (2020) found that drip pricing raised firm profits and resulted in consumers paying more than they would if firms were required to charge a single all-inclusive price up front. A series of experimental studies by Santana et al. (2020) similarly found that drip prices caused consumers to pick products with higher total costs.
- An empirical study by Ellison and Ellison (2009) of online sales of computer parts found that sellers used hidden fees to obfuscate actual prices and avoid price competition.
- A study by Agarwal et al. (2014) found that fee regulation can lower total costs if the fee is unclear – as is the case with drip pricing and other hidden fees – and the market is not perfectly competitive.
- An empirical paper by Agarwal et al. (2015) found that regulation of credit card fees saved consumers $11.9 billion per year in borrowing costs, with the largest impact on the lowest credit score borrowers.
Confusing or coercive fee practices risk harming not only consumers, but also small and medium-sized businesses, which can be targeted by the same kind of fee schemes – including surprise fees and unexpected cancellation charges. For example, common carrier industries – industries that provide essential services to dependent businesses – like ocean carriers sometimes use hidden and confusing fee practices to muddy the prices paid. Some shippers that rely on ocean carriers to ship their goods to market report that unpredictable fees added to a base price more than doubled the total price they paid for ocean shipping, and these costs are often ultimately passed along to consumers.
Junk Fees Hit Low-Income Households and People of Color the Hardest
While the extra costs of junk fees affect everyone, they disproportionately impact lower income households and people of color. For example:
- A CFPB study found that consumers in low-income and majority-Black neighborhoods paid disproportionately more in credit card late fees.
- A survey by the Financial Health Network found low- to moderate-income households incurred overdraft fees at nearly twice the rate of high-income households and that Black and Hispanic households were charged overdraft fees at substantially higher rates than white households.
- A 2017 report by the National Consumer Law Center found that Hispanic car buyers paid more in costly add-ons – such as service contracts, insurance, and window etching – than non-Hispanic car buyers.