This week, President Biden convened members of his cabinet and other agency heads to talk about actions we can take in a whole-of-government approach to spur competition in our economy.
As sectors of our economy have become more consolidated and dominated, Americans are now experiencing more and more anticompetitive fees. Service charges inflate ticket prices, resort fees hike our costs to stay in hotels, and our phone bills are often laden with mystery charges. These junk fees make it harder for us to choose the best product or service, since the true cost is hidden.
Banking is no different. Today, the CFPB is launching a new effort to help save American families billions of dollars in junk fees in their financial life. We are requesting public input about the fees imposed on us across consumer financial products, like on bank accounts, credit cards, and mortgages.
Large banks haul in huge sums in fees from retail customers. Prior to the financial crisis, bank regulators were lax when it came to these fees, since they allowed banks to have a steady stream of revenue regardless of broader economic conditions.
In many cases, junk fees often act as penalties, like with non-sufficient funds and credit card late fees, rather than compensation for a legitimate service. While it may make sense for banks to pass on the cost for extra services provided, many complain that these fees are far higher than the service is really worth.
Last month, the CFPB reported how banks have become more dependent on these fees to feed their profit model on checking accounts. In 2019, bank revenue from overdraft and non-sufficient funds fees surpassed $15 billion with the average cost of each charge between $30 to $35. But that’s not the only product where large financial institutions feast on their customers through fees. In 2019, the major credit card companies charged over $14 billion each year in late fees with an average charge of around $35. And when buying a home, there’s a whole host of fees tacked on at closing where borrowers feel gouged.
Collectively, we estimate that junk fees drain tens of billions of dollars per year from American family budgets. But when markets become dependent on these back-end fees, it makes it harder for families to realize the benefits of competition. Today, with our request for public comment on junk fees, we are beginning the process of ending banks’ reliance on these exploitative income streams and making prices and features clearer upfront.
Our request for information will help us learn from the public about how we can address the explosion of junk fees. I expect that this will translate into several actions:
First, we will use the information to issue new rules and guidance to spur competition and transparency. This includes reviewing some of the rules the CFPB inherited at the agency’s inception from the Federal Reserve Board of Governors a decade ago.
Second, the information will help us identify why financial institutions don’t compete on certain types of fees and features. This will aid in identifying illegal practices through our supervision and enforcement work.
Finally, we also hope to learn what new market entrants are doing to be more upfront and honest with prospective customers. This will help us as we craft new rules that will give consumers more control of their data and more opportunities to move their money. If our banking system can become more open and decentralized, we can all benefit.
My hope is that we can move toward a market that works for families and honest financial institutions alike. Many large banks have recently announced that they will reduce or eliminate overdraft fees and meaningfully compete through friendly features. This is progress, but it is not enough. Today’s initiative is another step towards facilitating continued change throughout the market and saving the American people billions of dollars every year.