Have you ever wondered what an administrative fee goes toward? I’m talking about that extra charge you have to pay when you fill out just about anything these days. A preschool application for your child; updating your car insurance account; changing your address; paying your bill over the phone rather than online; all those charges they add on at the end whenever you buy a ticket for a movie, show or anything else.
What’s even more aggravating is that it’s as if the companies are just making up numbers: $25 here, $100 there, $33 and 77 cents elsewhere. Why are these numbers so random? What is your money going toward? Are we all just being fleeced, every second of the day? Let’s find out.
At one point in human civilization, administrative fees actually paid for administrative stuff — at least, in theory. Before computer databases and networks, data entry was a tedious but in-demand job. Most offices had file clerks (some still do) whose work consisted entirely of recording your information, filing it away, managing those files and retrieving them from filing cabinets, massive file rooms or on microfilm. They, of course, didn’t work for free, and thus, administrative fees covered the cost of this labor.
But nowadays we seem to fill out everything online, or at least electronically. Your information is stored on an infinitesimal bit of real estate on a microchip inside a company’s server somewhere. It takes up no physical space, required no one to file it away, and can be retrieved with a simple computer search. What, then, requires an administrative or processing fee?
The administrative fee is either actually part of the true cost of whatever you’re paying for, or just an opportunistic tack-on. Tom Warschauer, an emeritus professor of finance at San Diego State University, breaks it down thusly: “Consumers like commoditization [where all products can be boiled down to their raw components] because it makes it easy to find the least expensive acceptable choice, particularly post-internet. And all companies like to avoid that.”
Warschauer says companies avoid commoditization in many ways with which you’re no doubt familiar: Through differentiation (“our gasoline has a unique additive”); complexity (“our insurance is so comprehensive even our agents don’t understand it”); misleading pricing (airline baggage fees, or ad-supported smartphone apps); or lastly, a nickel-and-diming strategy (added-on fees small enough not to scare off consumers). Basically, it’s all the flashy things that catch your attention and make it harder for you to easily, rationally compare products.
With that in mind, ancillary fees are, in many cases, baked into the actual cost of the product — they’re just served to you at a different time, in a different way and with a new name, the point being to make the sticker price look more attractive than the actual cost.
Naturally, this isn’t a popular move. This BBC article on insurance companies who charge administration fees quotes Richard Lloyd, a consumer protection advocate in the U.K., who states, “There is no reason at all why the insurers shouldn’t be telling people upfront really clearly what any changes to your policy will cost. It’s part of what you need to know if you’re going to shop around and choose the best value insurer for you.” Which is just common sense — and precisely the reason companies don’t do this.
Of course, there’s also the fact that when you get the customer conditioned to paying a fee for some kind of transaction, they’re more likely to just go along with it in the future. When a big communication company started charging a $0.61 “administration fee” to its wireless customers several years ago, it estimated it could make $350 million in extra revenue just in the first year, and more than half a billion the following year.
But what does this small fee go toward, you ask? It’s to “help cover certain expenses, such as interconnection and cell site rents and maintenance,” according to the company. That’s essentially corporate speak for, “Oh, you know…things, and, ah, stuff like that.” People were angry (nothing new for big communication companies), but they went along with it — after all, who’s really going to switch to a competitor over a 61 cent charge? Besides, the telecom behemoth had a pretty watertight defense: Everyone else was doing it too, which tells us a lot about administrative fees in general.
Then there’s the audaciously named “Convenience Fee” that a big ticket sales company used to charge for years. Even today, when you buy event tickets, fees are generally tacked on at the end, or step-by-step in the buying process, which, collectively, can add 20 percent or more to the ticket price. In fact, the company discovered through its own data that revealing the costs at the end led many people to abandon their sale entirely (something I’ve done myself, several times, outraged) while revealing the costs upfront made it more likely that customers would go ahead and buy the ticket.
The problem with just putting everything upfront — according to the ticket sales company — was that the company couldn’t boil down all costs to a per-ticket fee until it knew how many tickets were being bought, and the shipping method chosen by each and every customer. All of which seems like a lame excuse to me.
So are administrative fees always BS? Pretty much. One minor caveat may be those times when you get charged for paying your bill with the customer service person on the phone, rather than using the automated system, which is sort of using up manpower.
Whether it really justifies the fee? That’s a lot less certain.