Land of the Fee

BusinessWeek
SEPTEMBER 29, 2003

COVER STORY

Fees! Fees! Fees!
Companies can't raise prices, so they're socking consumers with
hundreds of hidden charges--and that's creating stealth inflation and
fueling a popular backlash

America used to be the land of the free. Now, it's the land of the
fee. Companies, hard-pressed for money, are taking every possible
opportunity to nickel-and-dime people to death. Need a monthly
brokerage account statement mailed to you? Ameritrade (AMTD ) may
charge you $2 per statement. Want your hotel room cleaned? The
Alexander Hotel in Miami Beach, Fla., will bill you an extra $2.50
daily for housekeeping. Have to return a new camcorder? Best Buy (BBY
) Co. will dock you 15% as a "restocking fee." Want to buy a season
ticket for pro football? The New York Jets will make you pay $50 for
the privilege of getting on their waiting list.

The U.S. economy has become sneaky. Inflation is officially low, but
Americans face an ever-growing mountain of extra charges that are
pushing up the true cost of purchases. No area is safe, from retail to
finance to travel to sports. "You have companies charging fees for
things that were free on an unprecedented scale," says Claes G.
Fornell, marketing professor at the University of Michigan Business
School.

The extra hits -- each one typically small by itself -- add up to big
money. AT&T (T ) could bring in as much as $475 million by charging
its long-distance customers a new 99 cents monthly "regulatory
assessment fee." Fresh fees for services such as housekeeping will
generate $100 million for hotels this year, according to
PriceWaterhouseCoopers. Fees on consumers who pay bills online bring
banks an estimated $2 billion. And credit-card late-payment fees -- up
by 11% over the past year, on average -- could reach an astonishing
$11 billion this year, estimates investment bank R.K. Hammer.

The fee frenzy is mainly an attempt by Corporate America to escape the
brutal price wars of the past few years. Companies can't raise list
prices without losing business, so they are burying higher charges in
the fine print instead. "It's much easier to raise a price through
obscure fees and surcharges than it is to raise a sales price," says
Stephen Brobeck, executive director of the Consumer Federation of
America.

The plethora of stealth charges makes it much harder for consumers to
use the Internet to do comparison shopping, as they started to do in
the late 1990s. The result is that apparently simple buying decisions
are turning into a hopeless and discouraging labyrinth. In response,
frustrated consumers are fueling a backlash, including the creation of
new vigilante organizations to pressure companies to roll back fees.

The growing significance of extra fees means that inflation is
understated. Surprisingly, many add-on charges are not reflected in
the Bureau of Labor Statistics consumer price index. One reason is
that many companies, especially in airlines and telecom, haven't
provided the BLS with a full breakdown of their charges. In addition,
fees for such things as credit-card late payments and airline-ticket
changes -- both rising -- are not included in the government's
figures. The implication: Fears of deflation may be overblown.
Instead, the true rate of inflation, so important for setting monetary
policy, is probably higher than the 2% or so that the BLS is
reporting.

State and local governments are also willing participants in the fee
game. Rather than hike taxes, politicians are hitting up Americans
with a bewildering array of fees, fines, and penalties. Cash-strapped
states will pull in $2.6 billion in new revenues this year by raising
more than 200 different fees on everything from fishing licenses to
fingerprint processing to driving with new tires. On Aug. 15, the fine
for driving without possession of a driver's license in New Jersey
jumped to $173, up from $44. Some of the charges are ridiculous: With
some exceptions, blind Massachusetts residents will now have to shell
out $10 once, and $15 every five years, for certification that proves
they are legally blind.

Already, the new wave of consumer outrage is having serious
consequences for politicians. One reason California Governor Gray
Davis lost so much support was the popular outrage after he hiked
car-registration fees that he had cut several years ago. They will
triple this year, to an average of $234 annually, up from $76.

Corporations are feeling the heat as well. A string of suits involving
fee abuses filed by class-action lawyers, state attorneys general, and
private groups like the AARP are under way. New York State Attorney
General Eliot Spitzer made Sears, Roebuck & Co. and EchoStar
Communications (DISH ) Corp. pay millions of dollars to settle claims
of excessive surcharges on recycling car batteries and undisclosed
satellite-service termination fees. "We were not aware New York had a
law capping the fee, and once we knew we changed it almost
immediately," says Sears spokesman Bill Masterson. Echostar points out
that there was no finding of wrongdoing and that it settled to avoid
costly litigation. And a California Superior Court judge has ordered
MasterCard and Visa to refund $800 million to customers for charging
hidden fees on purchases made in foreign currencies. Visa denies the
charges and is fighting the ruling. MasterCard plans to appeal the
suggested restitution procedures.

There are other signs that popular dissatisfaction with fees may
finally be having an impact. Fees for using ATMs have been a bane of
consumers for years. On Sept. 3, Washington Mutual (WM ), one of the
most aggressive retail banks in the country, stopped levying such
charges on users of its ATMs in the New York area, even ones with
accounts at other banks. Meanwhile, Congress is weighing tougher
disclosure requirements for mutual-fund fees and for mortgage closing
costs, which can be hundreds of dollars. "There are incredible abuses
out there," says Housing & Urban Development Dept. Secretary Mel
Martinez.

Fees have long been a fact of life in some industries, such as
financial services and travel. Car renters, for example, are used to
having their bills inflated by extra charges, such as gas-tank refill
penalties.

But the urge to raise fees has gotten out of hand. One of the worst
offenders is the telecom industry, which advertises cheap wireless and
long-distance calling plans and then lards on extra charges that add
20% to consumers' cell-phone bills, on average. Many wireless-service
providers are charging extra to help pay for new technology to enable
customers to switch companies without giving up their phone numbers.
Sprint PCS, for example, is charging 18 million customers $1.10 a
month, which would amount to $238 million annually. Sprint refuses to
confirm or deny the total. AT&T's regulatory assessment fee, charged
to its long-distance customers, covers such items as property taxes
and expenses associated with regulatory proceedings.

Phone companies justify their extra fees as the only way to cover
expenses without losing customers. "Sprint's recovery of these costs
via the surcharges will end when these costs are recovered as
permitted by law," says spokesman Dan Wilinsky. Adds AT&T spokesman
Bob Nersesian: "If you're advertising a higher rate based on your
expenses, and your competitors are advertising a lower rate but adding
various fees at the bottom of the line, what are you supposed to do?"

Other companies use charges to weed out unprofitable customers or to
change their behavior. Some airlines have recently started charging
passengers $50 for paper tickets and $25 for every bag over 50 pounds.
Ameritrade's $2 fee for monthly statements encourages people to wait
for free quarterly statements or to get updates on their accounts
online. And most online brokerages impose an extra fee on small-time
investors who do not make a minimum number of trades. E*Trade Group
Inc. and TD Waterhouse introduced in 2001 "maintenance" fees on
brokerage accounts. "Our customers have access to streaming quotes, a
rich set of research tools," says Connie Dotson, E*Trade's chief
communications officer. "If the account itself doesn't generate the
revenues to offset the cost, then for that value we charge a
maintenance fee."

Package-delivery companies such as United Parcel Service (UPS ) Inc.
and FedEx (FDX ) Corp. have offset increased expenses by adding on fee
after fee over the past few years. Starting in 1999, package-delivery
companies charged $1 per package for deliveries to remote areas. Now,
they tack on "fuel surcharges" for the gas in the planes, trains, and
trucks used to deliver packages. These fees are broken out on bills
for regular customers, though not always for infrequent ones. Indeed,
Airborne (ABF ) Inc. has listed a 25 cents charge for handwritten
airbills on its Web site even though the company says it doesn't
charge it. "It covers us in case we do decide to charge the fee in the
future," says spokesman Robert Mintz.

In the retail sector, fees take a different form. Target (TGT ) Corp.
and Best Buy Co. make customers pay a "restocking fee" of 15% for the
privilege of returning electronics items such as camcorders, laptops,
and radar detectors. Although neither Target nor Best Buy will
disclose how much they earn from such fees, it's not small change for
consumers. Best Buy justifies the penalty as a way to discourage
people who would take the camcorder, say, and return it after using it
once. Target did not return repeated calls.

So many people have asked about these restocking fees that
Massachusetts' consumer-affairs department posted an alert about the
practices on the Web in August. It warned that some retailers made
people pay such fees even when they bought a defective product.
"That's illegal," says Tatum Zuckerman, at the state's consumer
hotline.

Not to be outdone, the original leader in fees, financial services, is
finding new ways to raise revenue from customers. The growing
dependence of banks on fee income has spawned a new breed of
consulting, such as at Houston-based Strunk & Associates LP, which
helps banks find new sources of revenue. One example: offering
protection against bouncing checks, for a fee. Strunk justifies such
fees as a way to improve customer service.

No one can beat the credit-card industry for its fee inventiveness.
Deadlines for paying bills have been shortened to as little as two
weeks, and they're strictly enforced, producing more late fees. Not
coincidentally, the number of credit-card issuers with $35 late fees
doubled last year, says Consumer Action. People can avoid late fees by
paying their bills over the phone or online. But some banks and
credit-card companies charge for that, too. Washington Mutual charges
virtually all of its customers a total of $60 a year to pay their
bills online. And it costs $15 to pay bills at the last minute over
the phone at MBNA Corp. and Providian Financial (PVN ) Corp. MBNA and
Providian say it takes staff time to process these payments by phone
and that customers can pay online for free.

It does make sense to charge a premium for added services that cost
more to provide, rather than force all customers to pay the same
amount, whether or not they use the extra services. Splitting out such
fees helps keep basic costs low. One example: charging extra for
airline food. United Airlines Inc. has been trying out making
passengers on certain flights pay $10 for chicken sandwiches supplied
by TGI Friday's and meals from Eli's Cheesecake. Northwest Airlines
and US Airways Group Inc. have also started to charge for food. "It's
proven to be extremely popular," says US Airways spokesman David
Castelveter. "Customers have a choice."

But many fees have no such justification, and ultimately, the niggling
could cost companies their customers. Consider Natalie Armstrong in
Gorham, Me. She and her husband have been back to Sears only once
since her husband Lester was ambushed in January by $29 in
late-payment fees along with a $1 "service" charge from a Sears credit
card for a $14 part for his saw. After he convinced one clerk that his
payment was actually on time, the company hit him with $30 more in
fees. In the end, he handed over $60 in cash to a salesperson. After
being contacted by BusinessWeek, Sears pledged to refund the late-fee
charges.

Some banks are backing down after a barrage of criticism. Bank of
America stopped charging customers to pay bills online last May when
it discovered it could get more of their business if it offered the
service for free. Last December, Bank One (ONE ) Corp. ditched a $3
charge for no-frills checking-account customers to use a branch teller
when it discovered that irate customers were bolting to rivals.
"Imagine if you are a retail store and your goal is to sell sweaters,
and you're charging admission," says Charles W. Scharf, president and
CEO of retail banking, who changed the policy after he got his job in
May, 2002. "It's counterproductive."

Still, many businesses are holding firm. The New York Jets responded
to fans outraged over the waiting-list fee by announcing that people
lucky enough to get season tickets could deduct the $50 they paid for
waiting for them. The goal of the fee, says the Jets, is to prune the
list to fans who are genuinely interested in buying tickets. "Some
people aren't even alive who are on the list," says spokesman Ron
Colangelo.

Nobody figures fees will be eliminated entirely. But as the country
recovers from an era of corporate scandal, it's not too much to ask
that companies keep prices easy to understand. That way people will
know they're getting what they pay for.

By Emily Thornton
With Michael Arndt in Chicago

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SEPTEMBER 29, 2003

COVER STORY

How to Stand Up to the Nickel-and-Dimers

In a world of fees gone wild, what's a consumer to do? In some
industries, such as banking, complaining customers can sometimes get
fees rolled back. In others, such as telecom, it may be best to seek
out competitors without fees. When a charge seems especially
underhanded, an individual may want to join a consumer-action group.

In retail banking, consumers can get around certain fees if they're
willing to give up some services. The first step is to get educated:
Ask about the pricing and fee structure before signing up for a
service. It may be possible, for example, to avoid checking-account
fees, which can be as high as $20 a month, by signing up for direct
deposit or forgoing the return of canceled checks.

But don't stop there. Given industry competition, banks are often
willing to reduce other fees when faced with a determined customer.
Call to question unreasonable or inflated charges. "In a marketplace
where prices are increasingly negotiable, complaining consumers have a
fair chance of persuading sellers to reduce or eliminate individual
fees," says Stephen Brobeck, executive director of the Consumer
Federation of America.

Credit-card companies often will waive late fees for longtime
cardholders in good standing when requested. You also have some clout
when it comes to annual credit-card fees: Call the company and ask
about the costs of other cards it offers. You may get a better deal by
switching.

An effective option, of course, is to change companies when
dissatisfied with fees. "The most successful consumers are the ones
willing to walk away," says Matthew Smith, founder of complaints.com,
an online database of consumer gripes. Major long-distance phone
carriers AT&T, Sprint (FON ), and MCI introduced new fees this summer
and may be faced with a customer exodus once people discover that
low-priced long-distance carriers such as TCI and ZoneLD are just as
good -- and they "don't have the same fees," says Bill Hardekopf, CEO
of SaveOnPhone.com, a consumer Web site.

SaveOnPhone.com is one of the many vigilantes that have popped up all
over the Web to police extra charges. This site helps consumers shop
for cheap long-distance service by comparing carrier plans, providing
a rate calculator, and offering consumer tips. Phone-bill-alert.com
asks consumers to watch their phone bill and report any fee increases
to the site. If the phone companies have violated any regulations, the
site will alert the appropriate agencies. Consumers can also earn up
to $20 if they are the first to report a rate or fee increase not
already listed on the site.

Two more general Web sites, rip-offreport.com and complaints.com, give
consumers a place to report and vent their frustrations with companies
that charge excessive fees.

Finally, outraged individuals can look for help from consumer groups
such as Consumers Union or the U.S. Public Interest Research Group.
These knowledgeable, politically savvy organizations know how to
effect change. Consumers Union, for example, took on Barnes & Noble
(BKS ) Inc. and Blockbuster Inc. for the monthly service fees they
charged on unused balances on electronic gift cards and certificates.
"It's your money; you [or someone] paid in advance, so you shouldn't
have to pay a fee," argues Gail K. Hillebrand, an attorney at
Consumers Union in San Francisco. The group helped get a law passed in
California in July that bans nearly all fees on gift cards and
certificates.

Such action may well become more common as frustration with fees
grows. If it does, corporations might back off from nickel-and-diming
those they are supposed to serve.

By Toddi Gutner in New York

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(citizen) wrote in message ...

In a world of fees gone wild, what's a consumer to do? In some
industries, such as banking, complaining customers can sometimes get
fees rolled back. In others, such as telecom, it may be best to seek
out competitors without fees. When a charge seems especially
underhanded, an individual may want to join a consumer-action group.

A lot of these fees are just a form of what economists call price
discrimination; when a company figures out a way to charge different
customers different amounts for the same services so that they
maximize revenues by charging the spendthrifts more than the
cheapskates. My experience has been that with many fees its just a
matter of calling and complaining to get them eliminated, i.e. the
tightwads who are motivated enough to make a call don't have to pay
them, but everyone else does.

My wife and I routinely complain about mysterious fees that show up
and routinely get them cancelled. Often they are just testing you to
see if you will fall for it. Its ranged from roaming fees on a cell
phone when we never left town, an internet provider "forgetting" to
apply an agreed discount, charges for three-way phone calls we never
made, a bank account suddenly starting to charge a monthly fee, etc.

Andy