America is hardly a country without crises. President Biden’s democrats only just scraped through a victory in the Senate earlier this year. And yet, with precious little time, the US leader has chosen to add another priority to his list: scrapping “junk fees”.
If you’ve ever bought a ticket, booked a flight or sent money abroad, you’ll have paid a junk fee. Junk fees are markups, often hidden, that are added to payments under the guise of a “booking”, “convenience”, or “admin” fee, or something similar. They are unfair and add up – in the US, credit card and banking fees alone cost consumers $24bn (about £20bn) a year.
Each year, UK consumers lose significant amounts of money to junk fees. Ticket sites charge booking fees that can top 10 per cent of the price of a ticket. A returned payment fee – charged when a payment is rejected due to a bank account having insufficient funds – can run to £12. Account maintenance fees, charged to accounts with low balances, are another example and can be highly counter productive.
The scale of these fees can be disorientating. Globally, we lose more than £187bn a year in hidden fees just on international payments, a sector known for high, often hidden fees.
Worse, the problem isn’t just limited to consumers. Small businesses can be hit particularly hard, especially when banking internationally. This has real implications: of all British small and medium-sized businesses put off from expanding abroad, 30 per cent are put off by the cost and hassle of international banking services, which are blighted by fees.
Solutions exist. Regulation could be tightened to force banks to better disclose additional fees. CBPR2, for instance, requires banks to charge no more for euro payments than domestic ones. However, banks try to get around this by hiding their fees in marked up exchange rates, something that should at least be made clear. Other regulations could be improved by forcing banks to be more transparent. Similarly, the FCA’s own guidance urges providers to ban hidden fees. Once fees are made transparent, consumers and small businesses are in a better position to demand change and compare the market.
Competition helps, too. Once, banking and finance was a closed shop. Today, big incumbent players face real competition from neo banks and fintechs, young and innovative businesses able to cut prices.
However the quickest route to change runs through those that charge the fees. Banks operate in a difficult environment. They face heightened competition, lots of regulation and many have been built to operate domestically, all of which makes it hard to deliver effective, profitable services for international banking. However, they should still at least make fees transparent. They could also reduce fees by working with fintechs that offer integrated services that reduce the amount of products banks have to build and maintain, while allowing them to focus on their core services. A bank that takes the lead on fighting fees could enjoy a real reputational boost.
Junk fees have long blighted consumers and small businesses. It’s good to see them called out, better to see them tackled – even if this is happening overseas. Now, with consumers and small businesses feeling every penny, it’s time they found the bin here in the UK.