The Cost of Hidden Fees: Why the Junk Fees Prevention Act Matters

For decades, companies have been making money by luring consumers in with low prices, and then adding on “surprise” extra costs when it comes to payment. By the point the consumers are made aware of the extra costs, they have already mentally committed to the purchase, and for the most part - go ahead with it regardless.

These surprise extra costs are known as junk fees, which the Federal Trade Commission (FTC) describes as “hidden and bogus fees that can harm consumers and undercut honest businesses.” According to President Biden, they can add up to hundreds of dollars a month for consumers. President Biden is doing everything in his power to make junk fees illegal, and stop companies from using this essentially dishonest practice. He describes junk fees as “charges that are taking real money out of the pockets of American families.”

Why are junk fees harmful to consumers?

The thing with junk fees is that on surface value they look small: $30 here, $15 there. But in reality they represent something much more. On a very simple level, these fees add up. Reuters quotes President Biden saying “Research shows that without realizing it, folks can end up paying as much as 20% more because of hidden junk fees than they would have paid if they could see the full price up front and compare it with other options. It's wrong.”

Junk fees also disproportionately affect low-income individuals who are already financially strained: those who live paycheck-to-paycheck and don’t necessarily have the ability to absorb these hidden and unexpected charges. They force these consumers to divert their hard-earned money away from paying bills and savings, perpetuating the cycle of debt and financial insecurity for many families.

This not only harms individual financial well-being but also contributes to the broader issue of income inequality, where those with limited financial resources are hit the hardest. These additional costs can exacerbate their economic challenges.

Lael Brainard, Director of the National Economic Council, adds that “junk fees weaken the forces of market competition, penalize honest businesses, and hit the most vulnerable Americans the hardest.”

And there is also an impact on the wider economy. The lack of price transparency has a detrimental impact on business competition. When consumers and businesses are not provided with complete and clear information about the true costs of products and services, it creates an uneven playing field for businesses and stifles fair competition. Such lack of transparency allows some companies to gain an unfair advantage, as they can offer deceptively lower prices, drawing customers away from more transparent competitors.

This both hinders consumer choice and reduces the incentive for businesses to innovate and offer better value for money. In the long run, this can lead to market distortions and a less competitive economy, ultimately limiting growth and innovation. In order to promote a healthy and competitive economic environment, it is essential to ensure that pricing is transparent and that consumers have access to all relevant information when making purchasing decisions.

But junk fees are not illegal…yet

President Biden is urging congress to pass The Junk Fees Prevention Act (JFPA), introduced by Reps. Ruben Gallego (D-AZ) and and Jeff Jackson (D-NC). This law would eliminate junk fees and provide more price transparency for Americans, as well as fairer competition. The Biden administration categorizes junk fees into four categories:

1. Mandatory fees: service fees that are added on when purchasing concert or theater tickets online, and are unavoidable if you want to purchase the ticket.
2. Surprise fees: things like family seating fees charged by airlines, to allow families to ensure they can sit together on a flight. It is not a mandatory fee in order to purchase the tickets but it is a deal breaker for most families flying together.
3. Exploitative or predatory fees: excessive bank overdraft fees and early termination fees that target parts of the population that are economically vulnerable or locked into a service.
4. Fraudulent fees: - for example,  a no fee bank account that actually has hidden charges

Passing this legislation would have a profoundly positive impact on both individual consumers as well as the overall economy by ensuring transparency and fairness in financial transactions, protecting consumers from hidden charges.

If this legislation is passed, hundreds of companies (if not more) will have to change the way they structure pricing in order to ensure compliance, and plaintiffs attorneys will play a huge role in helping to ensure no company is cutting corners.

How has America reacted to the potential JFPA?

The JFPA has received support from many organizations. Erin Witte, Director of Consumer Protection at Consumer Federation of America praised the Senators for introducing the legislation: “The Junk Fee Prevention Act will crack down on some of the most egregious junk fees in ticket sales, hotel reservations, air travel, and telecommunications, and will level the playing field for consumers and honest businesses.”

The proposed legislation was also welcomed by John Breyault, National Consumers League Vice President of Public Policy, Telecommunications, and Fraud. “Hidden junk fees also harm honest businesses by making their competitors’ products and services look deceptively cheaper. The Junk Fee Prevention Act is a long-overdue solution that will help consumers keep more money in their pockets and promote competition in the marketplace.”

The support for the passing of this law by these organizations goes to show how needed the legislation is, and just how negative the impact of junk fees is in the United States.

We're already seeing a crack down on junk fees

Although the legislation has not yet been passed, we can already start to see a crackdown on junk fees in the United States. In July 2023, Bank of America agreed to pay $250 Million in compensation and penalties on junk fees, among other things. Of the $250 Million, $100 Million will go towards compensation to harmed customers and the remaining $150 Million will be paid as a penalty.

According to the Consumer Financial Protection Bureau, the bank was charging customers excessive overdraft fees and non sufficient fund fees which fall under Biden’s definition of fraudulent fees - the fourth category of junk fees. In addition to junk fees the bank has been double charging customer fees, withholding promised credit card perks, and opening new accounts without customer authorization due to pressure of reaching sales targets. This kind of business practice is shocking, dishonourable, and outright wrong. It is essentially stealing from innocent, honest Americans, who have worked hard for what they have.

$250 million is a large penalty. It demonstrates how seriously authorities consider junk fees, and sets the precedent for the scale of punishment non-compliant businesses can expect to pay.  

We've also seen the FTC take steps forward. On April 24, 2024, the Commission held an informal hearing on its own proposed rule to junk fees, the Trade Regulation Rule on Unfair or Deceptive Fees. And at the state level, we’ve seen multiple states begin to introduce and pass junk fee-related legislation.

In California, for example, Governor Gavin Newsom signed SB 478, or the Hidden Fees Statute, into law on October 7, 2023. This law, which went into effect on July 1, 2024, amended the existing California Consumers Legal Remedies Act to ban junk fees. It also eliminated drip pricing, the practice of “advertising a price that is less than the actual price that a consumer will have to pay for a good or service.”

Junk fees or junk businesses?

Junk fees are dishonest, limit price transparency, and distort competition. The more businesses are upfront about prices, the more consumers can make better decisions based on their budgets, and the competitive market can become a fairer place.

The passing of this JFPA would promote a more competitive and efficient marketplace, as businesses would be incentivized to offer clear and straightforward pricing, improving their reputations and attracting loyal customers. Ultimately, this regulation would foster trust and integrity in the business environment, contributing to a healthier and more robust economy while empowering consumers to make informed decisions about their financial matters.

We have a while to go until the legislation gets passed, however the general consensus in the US is that this law will provide benefits both to the public and the economy - and regulators are already cracking down on it.

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