Kerrigan: Financial dangers grow with government overreach on 'junk fees'

Calls for government intervention in the economy are often promoted as a way to provide relief and fairness. However, many of these proposals bring unintended consequences that carry long-term burdens on businesses and consumers.

For example, as part of the government’s all-out war on “junk fees,” federal agencies are planning to intervene significantly in the private sector and upend many longstanding business models. The downstream effect of such government overreach would harm far more consumers and small businesses than the relative few this misguided proposal claims to protect.

For the last three years, economic ambiguity has badgered small businesses. Indeed, there appears to be no slowdown among cautious small-business owners as they expect more headwinds or even a recession, according to a recent Small Business Check Up Survey.

These entrepreneurs note the challenges on various issues — inflation, rising interest rates and energy costs, among others. The policy attack on “junk fees” would only fuel these pain points and distract from actual solutions that could stabilize the economy and inflationary pressures, which are the source of relentless uncertainty.

Rather than promoting fairness and relief, most “junk fee” proposals would actually backfire on consumers. For example, the Consumer Financial Protection Bureau’s (CFPB) new rule imposing a cap on credit card late fees will ultimately force consumers to bear the brunt of the policy move.

Capping late fees will not only reduce incentives to borrow responsibly and will punish consumers who make their payments on time. Costs will be shifted, including a reduction in valuable rewards and cashback opportunities, higher interest rates, and ultimately reduced access to credit.

There is scant evidence that consumers are pushing for a government-driven change. According to a recent report, most Americans believe credit card late fees are legitimate and do not constitute “junk fees.” In fact, 76 percent say, “Paying on time is a personal responsibility I accept,” and that late fees are what they “agreed to pay” if they are late.

Furthermore, consumers do not think it is fair to be penalized for those who do not pay on time.

For example, the Durbin Amendment to the Dodd-Frank Act limited free checking accounts and increased minimum balance requirements. Unfortunately, the CFPB did not heed these warnings and, in fact, failed to adequately address concerns regarding the effect on small businesses and financial institutions.

In response, the Small Business Administration Office of Advocacy has recommended that the CFPB “maintain the status quo until it has sufficient data to ascertain the economic impact of this action on small entities.”

While the CFPB’s final rule applies only to “the largest credit card issuers,” the harmful effects of these regulatory exemptions for smaller financial institutions and small businesses are rarely contained. Access to credit and beneficial services will be constricted, restricted, or perhaps even disappear.

Capped fees will result in higher operational costs for financial institutions, reducing their capacity to offer needed lines of credit to consumers and small businesses. That is why the Small Business & Entrepreneurship Council signed a coalition letter with 30 other pro-growth and pro-consumer groups, outlining these concerns to President Biden and CFPB Director Rohit Chopra.

The letter explained that regulations like this “may cause smaller lending institutions — like credit unions that heavily rely on fees as a source of revenue — to struggle to sustain their operations, which will reduce the availability of credit” for Main Street businesses.

President Biden’s war on “junk fees” may seem like a winning election-year tactic for addressing the worries of consumers and small businesses about higher prices. But most voters know better. This government overreach will only lead to more economic and financial turmoil.

The administration would have been well aware of this fact if it had thoroughly analyzed and considered the long-term damage these proposals impose. Unfortunately, the pattern with this administration is to ignore the facts or move blindly forward without them, without regard to the consequences.

Karen Kerrigan is president and CEO of the Small Business & Entrepreneurship Council.