Tuesday , October 4, 2022

Payments 3.0: How Free Checking Dogs Financial Services

The entire financial-services industry shot itself in the foot with free checking.

Free checking taught customers that they should not pay any fees for the services they receive from banks and other financial companies. The attitude is, “Why should I pay to access my own money?” Since these same customers may also be some of the people who work at the regulatory agencies, it is not hard to see how this attitude would start shaping the regulatory climate.

On Jan. 26, the Consumer Financial Protection Bureau released a “Request for Information Regarding Fees Imposed by Providers of Consumer Financial Products or Services.” The Bureau made up for the bland title in its press release, saying the request was the start of an “an initiative to save households billions of dollars a year by reducing exploitative junk fees charged by banks and financial companies.”

In its filing, the Bureau gives the example of “resort fees added to hotel bills and service fees added to concert ticket prices” as example of junk fees. It then goes on to suggest that things like card-replacement fees might be an example of this.

The apparent underlying assumption of the RFI seems problematic. It seems to assume virtually any fee—whether it comes on a deposit account, a card, or a concert ticket—is a junk fee, and too high. It ignores the reality that all of these products cost money to offer, administer,
and protect.

Maintaining payments networks, online and mobile banking platforms, and ATM networks has a cost. Securing those systems from hackers, and preventing social engineering and friendly fraud, has a cost. Providing cardholders with a zero-liability guarantee has a cost.

Perhaps infrastructure does not resonate as a reason to charge fees. To put a human face on it, should customer-service agents work for free? In most cases, financial-services companies have people ready to help someone with a problem 24 hours a day, seven days a week, whether the customer needs them or not. What ensures those workers a living wage?

One example that the RFI gives as a possible “junk fee” is a charge for card replacement. It says this fee may be a “surprise” or “inflated.” Does anyone expect that a plastic card with an encoded magnetic stripe and programmed chip can be made, personalized, and put in a customer’s hands at no cost?

The RFI starts with the assumption that any fee is excessive. It asks “what fees exceed the cost to the entity that the fee purports to cover” and “What types of fees for financial products or services obscure the true cost of the product or service by not being built into the upfront price?” It returns to the original notion, implanted by free checking, that all fees are too much.

How would an individual customer know what the costs are of providing a service? Also, focusing on an upfront price distorts the conversation further. Should people pay upfront for the possibility of replacing a card, or should only those who lose a card be forced to pay for a replacement?

Fees may get out of whack from time to time, or a particular company might get greedy. But that’s not a reason to keep products out of the hands of consumers through excessive regulation. Making things free is what got us into this mess. We need to return to first principles and look at both sides of the balance sheet to conduct meaningful analysis that protects consumers. No judgment can be made about whether a fee is reasonable without a deep look into a product’s operating costs.

—Ben Jackson, bjackson@ipa.org

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