by Karan Gupta, CPAC Foundation Legal Fellow
The FAA proposed a new rule that would “require U.S. and foreign air carriers to seat children aged 13 and under adjacent to at least one accompanying adult at no additional cost beyond the fare.” This part of the administration’s war on so called ‘junk fees.’
Banning Price Unbundling
Banning price unbundling would hurt poor consumers and curtail their access to services. Currently, domestic airlines charge a separate price for ‘nonessential services’ like food or checked in baggage on short flights. This lets the airline increase its profits and reduces costs for the poor as they are now offered ‘cheaper basic ticket prices.’ Biden’s ban would push poor individuals out of the market entirely and compel individuals to pay for services they don’t want or need.
There is no explicit charge for “sitting next to your child on an air flight” or “a sitting with your kid fee.” However, if families want to guarantee that they will get seats together, they usually have to buy tickets that permit advanced seat selection, ‘pay for seat selection separately’ or simply hope that there are ‘adjacent seats available after check-in.’ The cheapest tickets/fares, usually do not allow seat selection. Banning this ‘fee’ would mean compelling airlines to give preferential treatment to customers who have children younger than 13 for free.
Structuring fees in this manner, provides more opportunities for profit. This allows airlines to charge lower basic airfares. Bureau of Transportation statistics show that revenue from basic airfares has dropped from 88.5% in 1990 to 73.2% of domestic airline revenue. ‘This pricing flexibility allows airlines to run more routes at lower basic prices.’ According to a 2022 Airlines for America survey, this is the most important thing for passengers.
The effect of this policy is to force other passengers to subsidize families with kids as there would be higher basic fares for everyone, in order to make up for the lost revenue. This would be a redistribution of income from one group to another.
The policy would entail higher basic fares for passengers, damage to ultra-low-cost airlines. Ultra-low-cost airlines help keep fares in the industry low by “stripping out perks and using fee revenues to ‘top-up'. Unbundling, gives airlines the change to make a profit on more flights and this spurs them to fly more flights which indirectly boosts competition.
This is far from the only time the Biden administration has sought to use government to use what effectively amounts to price controls. It has previously proposed cracking down on ‘junk fees’ in other areas such as banking.
Banning Termination Fees
Banning termination fees would harm credit-constrained consumers. These fees enable telecom companies to charge lower upfront prices than they otherwise would and provide more revenue certainty for businesses to support large investments.
This price structuring is also beneficial to liquidity constrained individuals who “enjoy reasonable future credit prospects.” This is because it enables them to access products without taking bank loans or ‘resorting’ to credit cards. The fee helps to “internalize the risk of nonpayment”. Outlawing these fees would cause ‘higher front-loaded prices, less certain revenue for businesses, and higher net prices in lieu of businesses bearing more risk associated with flaky customers.’
Banning Partitioned Pricing
Partitioning or ‘breaking a total bill into components’ can gibe consumer’s useful information. For instance, restaurants ‘sometimes include surcharges on bills to reflect large local minimum wage rises.’ This might possibly indicate to consumers that high prices are not because of greed but because of government interference in the market.
Limiting Credit Card Late Fees
The Consumer Financial Protection Bureau finalized a rule which capped credit-card late fees at $8, this is less than 25% of the typical past-due charge. According to a Wall Street Journal article: “Fifteen years ago, Democrats in Congress authorized financial regulators to limit credit-card late fees at a sum that is “reasonable and proportional” to a borrower’s violation. The Federal Reserve in 2010 capped penalties at $25 ($35 for repeat tardy payments), which are adjusted for inflation. The maximum penalty is now $41.”
The CFPB’s rule slashes the cap to $8 and eliminates the annual inflation adjustment.
The CFPB admits that the effect of lower penalties might be to increase the number of borrowers who pay late and as a result incur higher “interest charges, penalty rates, credit reporting, and the loss of a grace period.” This would increase the difficulty of qualifying for an auto loan or mortgage.
The agency also admits that credit-card issuers might raise interest rates, reduce rewards, and “increase minimum payment amounts or adjust credit limits to reduce credit risk associated with consumers who make late payments. Since some states cap credit card interest rates “some consumers’ access to credit could fall.”
This rule is coming at a time when credit-card delinquencies are at their highest level in more than ten years. “Issuers are tightening credit to reduce charge-offs. The rule could force more borrowers to turn to higher-cost credit such as payday loans. Businesses that contract with banks to offer credit cards will also take a hit. Late fees account for between 14% and 30% of department store credit-card revenue. They’ll have to offset the rule’s impact somehow, perhaps with higher prices.”
Restricting late fees on credit cards would be restricting the price of credit. Mandating price controls to prohibit prices from rising will limit the supply of the good in question.’ If the intent is to make credit more affordable, it will not just not work, it will have the opposite effect.
Restricting fees “will likely lead to prices rising in other financial services or lenders simply leaving the market.” According to Thomas P. Vartanian and William M. Isaac , ‘One obvious reaction to [a cap on fees] would be to increase credit-card interest rates. But increasing lending interest rates disproportionately harms lower-income borrowers who may no longer qualify for loans that require a higher income to carry a higher monthly payment. Borrowers with lower credit scores also would have a harder time obtaining a loan when the amount of lendable funds shrinks because bank revenue, no longer supplemented by late fees, would get smaller. Other possible moves reacting to such a cap would be a decrease in interest rates paid to bank depositors or the imposition of additional fees on other financial products or services. When those don’t work, lenders simply exit a particular market, reducing the consumer credit available to borrowers with lesser credit histories.’
Limiting Overdraft and Interchange Fees
The damage will be supplemented by the proposal to restrict bank overdraft fees to $3. When a customer makes a payment or withdraws from his account in excess of the available balance, a bank will let this transaction go through if you have opted for the overdraft protection service. The customer has to pay the overdrawn amount and an overdraft fee. This cap might compel banks to raise other charges such as ‘non-sufficient fund fees’ when debit-card purchases and ATM withdrawals that ‘overdraft accounts’ are rejected. Consequently, the agency proposed banning these also.
The administration is playing ‘whack-a-bank’, targeting a particular revenue stream and then hitting another revenue stream when it arises. Such price controls are detrimental to consumers who lose out as evidenced from previous cases. For instance, the Durbin amendment to Dodd-Frank instructed the Ded ‘to limit fees charged to retailers for debit-card processing. According to a 2017 Federal Reserve staff study, the consequence of this was that “larger banks reduced free checking and raised minimum balance requirements.” Small banks to whom the cap did not apply, also limited free checking because they now had less competition to compete with. Instead of lowering prices, the savings went into the pocket of retailers.
The Fed also proposed a rule that would lower the maximum debit interchange fee banks can charge merchants from 24.5 cents to 17.7 cents on a $50 debit transaction. Fed Governor Michelle Bowman said “one consequence may be that banks discontinue their lowest-margin products” which aimed to increase the banking access of lower income Americans. Congressman Andy Barr said, “All Americans should be outraged that the cost of credit will skyrocket and access to it will be meaningfully restricted in the name of politics…The credit card late fee rule punishes borrowers who pay on time to subsidize those who don’t.”
Comments