Illustration by Jan Buchczik
This article appears in the June 2024 issue of The American Prospect magazine. Subscribe here.
Most Americans are unfamiliar with terms like “ancillary revenue,” “shrouded attributes,” or “partitioned pricing.” But we’re all well acquainted with the feeling that we’ve been scammed, tricked, or flat-out deceived when shopping for products and services.
That’s why the phrase “junk fees,” coined by Consumer Financial Protection Bureau (CFPB) director Rohit Chopra, makes intuitive sense, even if you’re just hearing it for the first time.
The fact that “fees” almost always refer to non-optional costs was an important factor in settling on that descriptor, Chopra told me.
“I saw this as part of a really disturbing trend in the economy that was really about cheating rather than competing,” he said. “Rather than fess up to the real price of a product or service, you saw a swarm of consultants getting companies to price in ways that are much more difficult to understand, and the result is often a way to gouge people.”
Businesses large and small, from hotels and auto lenders to restaurants and utility companies, routinely charge a myriad of inscrutable and unavoidable fees—connection fees, equipment rental fees, “service” fees that beg the question, and “convenience” fees that are almost always a massive inconvenience.
Suburban Propane, a company in legal trouble from customer plaintiffs and state regulators, has a fee schedule on its website that includes: a safety practices and training fee, a tank rental fee, a transportation fuel surcharge, a restocking fee, a tank pickup fee, a minimum monthly purchase requirement fee, a system leak test fee, a reconnect fee, a will call fee, a forklift minimum delivery fee, a diagnostic fee, an installation fee, an early termination fee, an emergency/special delivery fee, a late fee, a returned check fee, and a meter account maintenance fee.
“Become part of the Suburban Propane family and enjoy our unwavering commitment to safety and customer satisfaction,” the website reads.
Some junk fees are announced to customers up front, and cover “unbundled” or “à la carte” selections—corresponding to some extra work the seller has to undertake. But many more are totally undisclosed, or concealed until the moment you commit, bank card in hand, having already spent significant time and effort. And, although companies always have a good excuse for imposing a junk fee, the unspoken reason is that they’re good for the bottom line.
IdeaWorks Company holds an “ancillary revenue master class,” a kind of junk fee boot camp.
The Department of Transportation estimates that airlines made $8.3 billion from baggage, flight cancellation, or change fees alone in 2023, eye-watering profits for services that used to be included in the ticket cost. Cable companies made an estimated $28 billion in 2019 by imposing charges like “broadcast TV fees,” even though people expect broadcast channels when they pay the advertised cost for cable. Ticketmaster’s events business has become synonymous with junk fees; in 2018, the Government Accountability Office estimated that fees for concert and sporting event tickets averaged between 27 and 31 percent of the total ticket price. One advocacy group claims that junk fees could cost the average family $3,000 a year.
Junk fees are also routinely targeted to lower-income people, and disproportionately against people of color. Some of the worst abuses occur in the rental housing market and in the criminal justice system.
The Biden administration has pursued a whole-of-government approach that targets opaque, mandatory charges and fees that are only revealed later in the purchasing process. The administration has even tried to cap or ban certain excessive or unnecessary fees, like the CFPB’s limitation on credit card late fees, or the Federal Communications Commission’s proposal to eliminate “billing cycle” fees that charge cable subscribers who cancel their service for an entire month, even if they canceled one day into the cycle.
It’s good politics; an April poll conducted by YouGov presented voters with 40 separate policy ideas, and the single most popular proposal was “ban businesses from charging consumers hidden or misleading fees for live event tickets, hotels, apartment rentals, and other services.” Another February poll of 600 likely voters in Minnesota, Pennsylvania, and Virginia showed that 83 percent said they would be more likely to vote for their legislator if they voted for junk fee legislation.
But that begs the question of how we got here in the first place.
“This is a direct result of moribund consumer protection and competition enforcement,” Chopra said. Many federal statutes and state laws include broad language that makes it illegal for businesses to engage in “deceptive acts or practices.” Yet junk fees have become ubiquitous in American commerce, enabled by a confluence of monopoly power, big businesses’ related ability to impact the shape and enforcement of the law, and the popularity of internet shopping.
JAY SORENSEN, PRESIDENT OF CONSULTING FIRM IdeaWorksCompany, should be more famous.
He has had outsize influence on the spread of unbundling and junk fees in the airline industry, and probably the broader economy as well.
Sorensen bluntly says his job is to “help airlines to make money from creating fees.” He’s careful to point out that carriers do the actual work of implementing pricing strategies—and that good business means well-served customers.
IdeaWorksCompany doesn’t only present reports and research on “ancillary revenue,” however. It even holds an “ancillary revenue master class,” a kind of junk fee boot camp, where Sorensen and others educate airline management on the latest innovations in pricing.
“I think we’re having this conversation today because of my involvement and my advocacy for this. I’ve had a big impact,” Sorensen conceded, adding that the ancillary revenue concept spread “sometimes far too aggressively.”
Broadly speaking, airline junk fees were introduced in the 1980s, after Congress removed federal authority over market entry, routes, and fares via the Airline Deregulation Act. Legacy airlines reacted in part by adding optional services to make them competitive with new, low-cost carriers, but also by decoupling services that used to be covered by the ticket price.
In the early 2000s, airlines began announcing “fuel surcharges,” explaining that they were needed to cope with rising costs of jet fuel. British Airways introduced its first fuel surcharge in 2004, for example, an added $4 a flight.
Yet just seven years later, British Airways was charging $420 extra on longer trips, as former Federal Aviation Administration (FAA) chief counsel Mark Gerchick writes in his 2013 book, Full Upright and Locked Position. In 2012, an analysis by travel management company CWT showed that the fuel surcharges had risen twice as fast as oil prices between April 2011 and May 2012. Only a handful of U.S. airlines actually decreased surcharges, despite drops in fuel prices during the period. As The New York Times reported, it had turned into a way to increase profits—a money grab, in short.
That pattern has repeated itself in the industry.
GRAEME SLOAN/SIPA USA VIA AP
Consumer Financial Protection Bureau director Rohit Chopra popularized the term “junk fees.”
Charging people extra for assigned seats, for example, is nearly 100 percent profit, Sorensen said. Ticket change fees can be all profit too, since the process is now automated. Travelers pay a 7.5 percent tax on airfares, in order to support air travel infrastructure. But the fees that carriers charge for “extras,” or just because they can, are exempt from that tax, depriving the government of money they’d otherwise get.
American Airlines became the first legacy U.S. carrier to begin charging fees for all checked bags in 2008. Those fees were also explained as a way to help with fuel prices and other rising costs after the Great Recession, yet they’ve mostly become the industry standard well after the economy rebounded.
All of that ancillary revenue is “deliciously profitable” for airlines, Sorensen said. “What’s missing from that equation is some kind of improvement for the consumer.”
A spokesperson for Airlines for America, a lobbying group representing the industry, told me airlines are committed to “clarity regarding prices, fees and ticket terms,” adding that “the federal government forces airlines to bury the cost of government taxes and fees” in the total cost. The group added that ancillary revenues were at historic lows, and average domestic round-trip fares were 14 percent lower in 2023 than in 2010.
Still, the government certainly doesn’t “force” airlines to “bury” any other fees within their total costs. And, according to Sorensen, Airlines for America’s ancillary revenue calculations are possibly incorrect, in part because they don’t include fees for assigned seats—a new and major category—in their definition of ancillary revenues.
Earlier this year, most of the major U.S. airlines raised their baggage fees from $30 to $35, and added another $5 if travelers decided to check at the airport rather than in advance, even though the bags are going to the same place. Airline executives claimed this was because it took more manpower to check at the airport, although anyone who has been to an airport lately knows check-in activities happen primarily on a self-service kiosk.
Perhaps the most absurd example came in 2011, when the FAA’s authorizing legislation expired for two weeks due to a squabble in Congress. This meant that the agency could not collect that 7.5 percent federal airline ticket tax on travelers, costing the government roughly $30 million a day.
Several major airlines were eager not to let the crisis go to waste.
They raised their base fare to the level of what the ticket tax would normally cost, pocketing the difference instead of turning it over to the government or passing along savings to customers. A few airlines even told customers that they would have to petition the IRS for a refund if they wanted to get their money back.
THE BUSINESS MODEL PIONEERED BY THE AIRLINES has now spread all over the economy.
The CFPB reported last October that some banks were charging customers “paper statement fees” and “returned mail fees” (a shrouded cost of opening the bank account) for statements “they did not attempt to print and deliver,” for example. One senior citizen had been assessed fees each month for five years, until she discovered that her account was nearly depleted, the agency said.
Likewise, restaurants in Washington, D.C., added new service charges to customers’ bills at the height of the pandemic—yet many of those fees have stuck around. Chopra commented that many companies have been “using supply chain shortages as an excuse,” much like the airlines did with fuel crises.
One rooftop bar and restaurant in downtown Los Angeles started charging a 4.5 percent “security fee,” much to the consternation of patrons. Reservation cancellation fees in New York City, if they’re even one minute after the restaurant’s deadline, can now cost as much as $100 per person.
The Biden administration has on several occasions lamented hotel “resort fees,” even tacked onto stays at hotels that cannot be seriously described as “resorts.” But hotel guests in Los Angeles sued Marriott last year over something else: a “hotel worker protection ordinance costs surcharge.” According to Marriott, the $10-to-$14-a-night fee helped them comply with a local law requiring personal security devices to protect hospitality workers from dangerous interactions with guests. The lawsuit estimated that a single airport Marriott makes $3.6 million annually off the HWPO junk fee—quite a bit for a system that amounts to a network of wireless pagers or walkie-talkies.
Almost all food delivery apps rely on a pricing strategy that shows added fees only at the final stage, on the final screen, before purchase. The industry term for that practice is “drip pricing,” which brings to mind the image of customers being waterboarded with costs until they succumb to the sensation of being helplessly drowned in fees.
Just making the task of buying something complex can be lucrative to companies.
Rental housing fees have also grown in recent years. The National Consumer Law Center and the National Housing Law Project identified several fee “innovations” in a comment letter to the Federal Trade Commission (FTC) last year. They included application and tenant screening fees; fees for services required of landlords like pest control and building maintenance; fees for use of common areas; fees for having a pet; fees for flexible month-to-month leases; fees for roommates or guests; fees for costs related to court cases involving the building; and so-called “January fees” that are charged at the beginning of the year without much explanation. “Valet trash” fees to take tenants’ trash from their door to a nearby dumpster chute are often charged whether or not renters use the service. And, in some apartments, you’re charged an extra fee for paying your rent, whether by check, wire transfer, or online.
Prisons are home to some of the most egregious junk fees, with a literally captive audience unable to avoid them. In March, two lawsuits alleged that St. Clair and Genesee Counties in Michigan prevent families from visiting their loved ones in prison, to funnel them toward online video visitation that charged by the minute. The county corrections departments had exclusive contracts with prison telecommunications providers that gave them up-front money.
One Genesee County official was quoted in the lawsuit saying, “That video visitation is going to work … A lot of people will swipe that MasterCard and visit their grandkids.”
Indeed, deceptive fees follow Americans from the cradle to the grave.
Assisted-living facilities, which are already incredibly expensive, have now taken to adding fees for assisting people with the things they need to continue living: $12 to check blood pressure, $50 to give an injection, or $315 a month to help people with their inhalers.
Even funeral homes have used these tactics to tag extra “opening” and “closing” fees onto people’s bills.
THE BIDEN ADMINISTRATION HAS A number of junk fee initiatives. The FTC proposed an outright ban last October, which would require up-front disclosure of all fees and ban drip pricing. The Department of Transportation just finalized a similar ban on hidden fees for airlines. The Department of Housing and Urban Development (HUD) banned certain non-rent fees in their properties, and encouraged housing providers to end junk fees. The Department of Health and Human Services has cracked down on deceptive “junk health insurance” plans. The CFPB is looking into mortgage closing costs, and has prohibited a variety of bank fees. The Department of Education has proposed ending student loan origination fees, automatic charges for textbooks, and the practice of colleges confiscating leftover meal plan balances at the end of a semester.
Bills to mandate up-front disclosure of prices have also been introduced in several states, including Minnesota, North Carolina, Virginia, Arizona, Pennsylvania, Connecticut, New York, Rhode Island, Colorado, and Illinois. California passed a junk fee ban last year, along the lines of the FTC’s proposed rule.
Although addressing junk fees is extremely popular, corporations and conservative politicians have resisted the new regulations. Business groups have sued to challenge a CFPB rule that caps credit card late fees—which has successfully led to a preliminary injunction—and have already warned the FTC that its proposed rule to ban junk fees will likely face a legal challenge. In Virginia, a proposed bill was killed after heavy lobbying by corporate representatives, according to the bill’s sponsor, state Sen. Stella Pekarsky.
Trade groups have argued that increased regulation of deceptive practices amounts to government overreach, and that their fees cover costs associated with particular transactions and services, like additional labor.
Others maintain that their practices are an overall benefit to the economy. They argue that drip pricing and similar practices aren’t a problem because customers can always walk away before completing the transaction; and, in any case, other businesses can compete by being even more transparent about their services, lowering prices, or exposing the sham behavior. In theory, that should increase competition and actually lower market prices.
But those arguments are mostly theoretical. Research has shown that they don’t really hold water for most of the practices we see today.
“The idea that firms get to set their price and consumers get to decide, that’s the center of competition,” said Stefano DellaVigna, a behavioral economist at the University of California, Berkeley. “But that doesn’t work if consumers don’t necessarily know or realize what the actual prices are.”
VICTOR AUBRY/SIPA (MIDDLE)
Prisons, live events, and airports are where you can find some of the most egregious junk fees.
Vicki Morwitz, a professor of business and marketing at Columbia Business School, has studied consumer reactions to different ways of framing prices, like a time-limited discount. Morwitz researches the psychology of how we process pricing information. Her experiments have shown that drip pricing results in the largest consumer welfare losses, when compared with four other common price-framing methods.
“Companies miss a lot of the consumer psychology here,” Morwitz said.
The research shows that drip pricing and similar deceptive strategies trigger a number of biases in people’s thinking that make it difficult to walk away. There’s the sunk cost fallacy, for example, when people overestimate the costs of starting the price comparison process all over. Or loss aversion, where customers worry that they may not be able to get a better deal elsewhere—perhaps prompted by a countdown clock at the checkout screen—or believe that every other business will just gouge them as well, whether or not that’s true.
Just making the task of buying something complex can be lucrative. A CFPB research report released in April set up an experiment of two similar products sold in different ways. The report found that the more complex method of pricing led to a more than 70 percent increase in cost, and that companies competed not over quality and service but on how they could confuse buyers into paying more.
Some businesses’ near-monopoly or actual monopoly power also exacerbates the problem. Consumers don’t have a choice of ticketing companies when they want to see Taylor Swift, for example: It’s Ticketmaster or nothing. And monopolies and oligopolies have little incentive to behave honestly, because customers don’t really know they’re being scammed, and don’t feel like they have convenient alternatives.
In 2014, StubHub tried to switch to “all-in pricing,” where customers pay only the advertised price. The company thought it might gain a competitive edge that would transform the event ticketing industry, company executive Laura Dooley said in March 2023.
Instead, “StubHub’s all-in pricing confused buyers who assumed our prices were exclusive of fees and therefore more expensive relative to our competitors,” Dooley said. “The result was a significant shift in market share away from StubHub to our competitors.” The company went back to the infuriating traditional pricing model the next year.
Those economic and market realities support increased regulation of junk fees.
BOTH EXISTING LAWS AND PROPOSED REGULATIONS leave sellers with broad freedom to set their prices and present them how they’d like; the laws only restrict their freedom to mislead or deceive customers. Moreover, big businesses have already erected large walls to prevent individual customers from using those laws to fight back.
For example, the use of pre-dispute arbitration provisions in consumer contracts made it nearly impossible for consumers to challenge many junk fees. Many of the clauses prohibit class action lawsuits, meaning that individuals have to go through a costly arbitration process simply to dispute a nominal added fee. This insulates businesses from the legal repercussions for their deceptive practices.
Until those background issues are addressed, government remains the last, best line of defense against junk fees—and officials have tools beyond the new regulatory rules. Some state attorneys general have begun battling junk fees by using their existing authority to prevent deceptive and anti-competitive practices. Outrage over the Taylor Swift ticketing fiasco could lead to a federal antitrust lawsuit against Ticketmaster, in part over junk fees.
Chopra told me his agency wants people to file more consumer complaints, and is working to enlist more state attorneys general in the fight.
Consumer protection advocates also can play a role. In January, a major restaurant group in Washington, D.C., dropped its newly introduced add-on charges after a nonprofit named Travelers United sued the company under the District’s laws for allegedly charging deceptive junk fees.
The Biden administration clearly feels banning junk fees is a winning issue for voters in November. In their view, consumers and voters would welcome a tough-on-crime push that seeks more regulation and enforcement against businesses that are constantly ripping off Democrats, Republicans, and everyone in between.
POSTSCRIPT: On May 23, the Justice Department did sue Ticketmaster and its parent company Live Nation over antitrust violations. Assistant attorney general of the DOJ Antitrust Division Jonathan Kanter said at the announcement, “Live music should not be available only to those who can afford to pay the Ticketmaster Tax.” He was referring to Ticketmaster’s array of junk fees.
