CFPB Publishes Research Finding Higher Price Complexity Leads Consumers to Pay More

WASHINGTON, D.C. – Today, the Consumer Financial Protection Bureau (CFPB) issued a new report that suggests consumers tend to pay more for products that have more complex pricing structures. The report is based on experiments with multiple rounds of buyers and sellers interacting in simple markets, and found that participants tended to pay more when prices were broken into sub-parts and were harder to understand. The research has implications for understanding how junk fees impede fair and competitive pricing in markets like auto loans or mortgages, where consumers have to evaluate extended warranties, add-ons, closing costs, and a wide variety of other fees instead of an all-inclusive price.

CFPB researchers had study participants act as buyers and sellers in a series of transactions. In some cases the objects for sale had a single all-in price, while in other cases the prices were split into 8 or 16 sub-prices. In the scenarios with more complex pricing, buyers tended to fare worse. The average selling prices rose, buyers had more difficulty comparing prices across sellers, and the overall amount paid rose. These findings contribute to a growing consensus of research and real-world observations showing that junk fees increase overall prices beyond what a fair and competitive market would allow.

While not expected to exactly mirror real-world transactions, the CFPB found in these experiments that more complex pricing generally led to more detrimental outcomes for consumers:

• Higher total prices: Sellers' total asking prices were 60 percent higher in markets with 16 sub-prices than in those with one price.
• Comparing prices was more difficult: Buyers were 15 times more likely to select a higher-priced option in markets with 16 sub-prices than in those with one price.
• Consumers paid more overall: Transaction prices were 70 percent higher in markets with 16 sub-prices than in those with one price, on average.

The CFPB has previously highlighted how the use of complex terms and pricing can pose challenges for consumers. In many instances, consumers face complex pricing when shopping for financial products and services including:

• Credit cards: Credit card pricing often includes a mix of interest rates, late fees, balance transfer fees, annual fees, cash advance fees, and foreign transaction fees. Many credit cards offer introductory 0% APR periods on purchases or balance transfers, but these promotional rates are often followed by much higher standard APRs that can vary based on the cardholder's credit score. Market data suggest that many consumers are selecting credit cards based on rewards, which can similarly be quite complicated, with varying earning and redemption rules.
• Checking and savings accounts: Checking and savings account pricing can include a variety of fees, such as monthly maintenance fees, minimum balance fees, overdraft fees, and wire transfer fees. Some banks also offer complex tiered interest rates based on account balances, making it difficult for consumers to compare yields across different institutions. Some checking accounts advertised as “free” may in fact require minimum balances, recurring direct deposits, or other qualifications that could obscure the true cost of the account.
• Mortgages: Mortgage pricing can be extremely complex, with a wide range of interest rates, fees, and terms that vary based on factors such as loan type, credit score, or down payment. For example, adjustable-rate mortgages (ARMs) can have pricing structures that include initial fixed-rate periods, adjustment intervals, caps on interest rate changes, and margin rates. And consumers often pay a large number of separate closing costs to obtain a mortgage.
• Auto loans: Auto loan pricing can be complex, with interest rates that vary based on factors such as credit score, loan term, down payment, and vehicle type. Some lenders also offer promotional rates or cash-back incentives that can make it difficult for consumers to compare the true cost of financing across different offers. Add-on products, such as extended warranties, gap insurance, and credit life insurance, can significantly increase the overall cost of the loan.

Read the report, Price Complexity in Laboratory Markets.

Consumers can submit complaints about financial products or services by visiting the CFPB’s website or by calling (855) 411-CFPB (2372).

Employees of companies who believe their company has violated federal consumer financial laws are encouraged to send information about what they know to whistleblower@cfpb.gov.