Junk Fees and Related Pricing Practices

 The White House is taking interest in hidden fees, both  because they interfere with competition on price (e.g. when Ticketmaster reveals fees only as someone tries to complete a purchase), and because they sometimes seem unconscionable.  Here's a White House statement.

The President’s Initiative on Junk Fees and Related Pricing Practices

"The Biden-Harris Administration is taking action on junk fees that hurt Americans’ pocketbooks and the economy."

"Exploitative or predatory fees. Excessive fees that target consumers who have limited alternative options – because they are locked into a product or service, or are otherwise economically vulnerable – can likewise impose a financial burden. As the CFPB explains, a sign of exploitative fees is that they “far exceed the marginal cost of the service they purport to cover.” Bank overdraft fees, which greatly exceed the bank’s cost of credit, and surprise “termination fees” are leading examples."

HT: Susan Athey

********

Regarding bank overdraft fees, my sense is that these drive lots of people away from the formal banking system and into the hands of high-interest-rate check cashing and payday loan services. Since we already regulate some debit card fees, I wonder if banks can't be encouraged to have some kind of debit-card-only "checking" accounts. Those would be able to prevent overdrafts, so they should be very cheap to administer, and would allow people to avoid paying very high fees and interest rates to non-bank financial services.

Payday loans: usury, or access to credit? by Allcott, Kim, Taubinsky and Zinman

Payday loans and other expensive services to those without access to formal credit generate a good deal of repugnance and regulation (including bans), but may be the only source of credit available to their habitual customers. Here's a new NBER working paper on that finds that experienced borrowers don't misjudge their chances of borrowing again.

Are High-Interest Loans Predatory? Theory and Evidence from Payday Lending  by Hunt Allcott, Joshua J. Kim, Dmitry Taubinsky & Jonathan Zinman  WORKING PAPER 28799, DOI 10.3386/w28799,  May 2021

Abstract: It is often argued that people might take on too much high-cost debt because they are present focused and/or overoptimistic about how soon they will repay. We measure borrowers' present focus and overoptimism using an experiment with a large payday lender. Although the most inexperienced quartile of borrowers underestimate their likelihood of future borrowing, the more experienced three quartiles predict correctly on average. This finding contrasts sharply with priors we elicited from 103 payday lending and behavioral economics experts, who believed that the average borrower would be highly overoptimistic about getting out of debt. Borrowers are willing to pay a significant premium for an experimental incentive to avoid future borrowing, which we show implies that they perceive themselves to be time inconsistent. We use borrowers' predicted behavior and valuation of the experimental incentive to estimate a model of present focus and naivete. We then use the model to study common payday lending regulations. In our model, banning payday loans reduces welfare relative to existing regulation, while limits on repeat borrowing might increase welfare by inducing faster repayment that is more consistent with long-run preferences.

***********

Update: here's the published paper

Allcott, Hunt, Joshua Kim, Dmitry Taubinsky, and Jonathan Zinman. "Are high-interest loans predatory? theory and evidence from payday lending." The Review of Economic Studies 89, no. 3 (2022): 1041-1084.

Download

Usury and theology

At Aeon, Alex Mayyasi writes about the work of banker turned theologian David Miller:

Of money and morals
Moneylending has been taboo for most of human history. So how did usury stop being a sin and become respectable finance?

"Vedic law in Ancient India condemned usury, and rulers routinely capped interest rates from Ancient Mesopotamia to Ancient Greece. In Politics, Aristotle described usury as ‘the birth of money from money’, and claimed it was unnatural because money was sterile and should not ‘breed’.
...
"In the 4th century CE, Christian councils denounced the practice, and by 800, the emperor Charlemagne made the prohibition into law. Accounts of merchants and bankers in the Middle Ages frequently include expressions of anguish over their profits. In his Divine Comedy of the 14th century, the Italian poet Dante Alighieri put the usurers in the seventh circle of Hell..."

"The stigma against moneylending continued well into the 1500s. To understand it, think about your reaction to the idea of a bank making a loan to a business at a 5 per cent interest rate. No problem, right? Now compare that to how you’d feel if your mother lent you money on the same terms. In Biblical times, the typical loan was more like the second case – it wasn’t an arms-length transaction, but a charitable loan from a wealthy man to a neighbour who’d experienced misfortune or had nowhere else to turn. "