Experience Stern | Faculty & Research

The term "junk fees" has proliferated in press articles over the last year or two. It is time to dispel the confusion surrounding this politically charged label, which often applies to the various fees banks find necessary to recoup current or expected losses. These fees, often characterized as excessive by consumer advocates, are actually a crucial part of a bank's revenue stream and are necessary to cover the costs of providing credit.

Just as in the arcade game Whac-A-Mole, when regulators "whack" a fee, it makes other modes of recoupment pop up: higher interest rates or other fees, restricting credit, etc. Understanding these mechanisms is crucial for policymakers.

The latest "junk fees" rage is related to late fees. Recent articles in the press have highlighted a surge in credit card interest rates and fees, such as those for paper statements, allegedly to offset losses anticipated from a potential unblocking of a court-blocked $8 cap on late fees proposed by the Consumer Financial Protection Bureau. But how does one determine if the increases in interest rates and fees are compensatory to offset the losses resulting from the cap imposition? The answer lies in applying the Current Expected Credit Loss, or CECL, accounting standard.

Read the full American Banker article.
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Joshua Ronen is a Professor at NYU Stern.