September 27, 2012
Virtually everyone has had the experience of paying a penalty for not paying a bill correctly. Making a credit card payment a day late or accidentally writing a check to the phone company for a dollar too little can cost consumers twenty or thirty dollars. And overdraft fees on checking account or debit accounts make even the most trivial adding err quite costly. But what happens when the mistake is on the other side?
Suppose the bank wrongly charges a $20 fee for having an insufficient balance in your account or the phone company charges you for services that you didn’t receive? Usually, if you can document your case and take the time to work your way through the maze of computer messages (press “1” for billing, press “2” for sales, etc.) to talk to a real human being you can get the company to remove the charge.
This requires both that consumers catch the error and then use a considerable amount of their time to correct the company’s mistake. At the end of the process they have just managed to break even, both the consumer and the company are in the same situation as if the mistake had never been made.
Notice the asymmetry in this story? If a consumer is a day late or a dollar short in their payment, they face big penalties. When the bank, the phone company, or the insurance company makes what could be a very large error, they face no downside risk, if the mistake is caught.
The last part of this story is important. Undoubtedly many errors made against consumers are not caught. Many people don’t review their bills closely enough to ensure that they are accurate. That becomes more likely as bills become more complicated. (Companies do make errors that favor consumers, but these are under their control.)
This creates a warped system where companies effectively have an incentive to mistakenly bill people for services that they did not provide or for fees they do not owe. Insofar as these billings go undetected this is free money for the company. Imagine sending letters telling people they owe you $30 for some non-existent service. In effect this is what companies are doing when they send out erroneous bills, but they get to save the postage and handling costs since they were sending out the bills anyhow.
There is an easy way to change the incentives. Suppose companies had to pay a penalty for improper bills. What if the law required that they pay a fee equal to 20 percent of any excess charges that appear on a bill? If the bank wrongly charges you $20 for an insufficient balance, then they have to credit you with an extra $4 as a result of the error. Or, if the insurer charges $200 for a procedure that was supposed to be covered under your policy, then they would owe you $40.
This would both give people more incentive to look at their bills closely and more importantly give companies incentive to get the bills right. Erring against consumers would not offer them the same opportunity for a free lunch as it does today.
It would be interesting to see the counterargument against such legislation from the industry side. Undoubtedly the Chamber of Commerce will produce a study showing that such a rule would cost businesses trillions of dollars in penalties. (And the media would no doubt report the findings uncritically.)
Fans of logic would point out that such a rule would only be costly if businesses are currently ripping off consumers for large amounts of money by billing them more than they owe. In this case we should want these businesses to pay lots of money. After all, what is the argument for businesses that rip off their customers? This rule would also work to the advantage of businesses that can figure out proper billing.
So that’s the cheap thought for the day. We can bill businesses that improperly bill their customers. It’s simple and fun will make for better markets, with no undeserving losers. In other words, it’s the sort of proposal that is a complete non-starter in Washington.
