What is a tariff?
A fee is a fixed price charged for a specific service. Fees are applied in various ways, such as costs, fees, commissions and penalties. Fees are most often found in highly transactional services and are paid in lieu of wages or salary.
How Fees Work
Fees are most often associated with transactional relationships, particularly with professionals who provide services. In some cases, fees are charged when a person hires a company to perform a specific task, such as cleaning a house or filing taxes. This type of fee is often the most transparent and transactional, as it represents payment for the sole reason that a paying business was hired. Examples of transaction fees include mortgage fees and money transfer fees.
It is important to read the fine print in contracts and ask about all fees so as not to be surprised by the “hidden fees” for a product or service.
Types of fees
Individuals and businesses pay fees for a wide variety of reasons. An individual may pay a financial advisor a fee to help choose and manage investments, and a family may pay a fee to a real estate broker when selling a home. A business may pay a fee to an accountant to help manage their books and to a security company to make sure the building is protected after hours. Governments may charge fees for obtaining a business license or an individual passport. Investment institutions may charge quarterly maintenance fees for accounts, and banks may charge overdraft fees when cardholders withdraw their accounts.
Key points to remember
- Most often, the fees are the payment you make for the service, both basic – mowing a lawn, for example, and complex – like making a will or preparing your taxes.
- Sometimes there is more than one fee charged for a service (i.e. buying a plane ticket for X amount of money, but being affected by baggage fees and travel expenses).
- Government fees (local and federal) are associated with obtaining a license, such as a driver’s license or a passport.
- Fees can add up quickly, for example, credit card companies often charge high fees for late fees. Asking hidden charges (or just charges that aren’t obvious) can save you a higher than expected bill.
Bank and investment fees
Fees charged by banks are less likely to be transactional in the sense that the account holder has not requested service. In some cases, such as when an account is overdrawn or a credit card payment is made late, fees are charged as a penalty.
In other cases, such as when a bank charges monthly fees to chequing account holders, these fees have little to do with the cost of maintaining the accounts. Regulations targeting banking activities have reduced or eliminated traditional sources of income, prompting these organizations to find other sources.
Investors who trade stocks, mutual funds and options must pay various fees. Stock transactions often have transaction-based fees called trade commissions, while option trading includes both transaction-based and contract-based fees. The fees paid for margin trading vary depending on the current margin balance, with a lower royalty rate levied on the higher balances. An investor looking to invest in mutual funds may face costs like the management expense ratio (MER) and the fees associated with loading funds.
A la carte fees
Fees may also be charged in situations where a client requests additional services. These à la carte charges are generally found in travel-related transactions. For example, a travel package may include the option of having ground transportation waiting for the client upon arrival at a port of call. One of the most recognizable examples concerns baggage on flights, as airlines often allow passengers to bring hand luggage free of charge but to pay for all checked baggage.
Have you ever noticed that your phone or cable bill or the price you paid for your dream vacation could be higher than expected? This may be due to additional charges added to the original price. Although most consumers expect to pay specific fees for the services they use, there may be additional fees that they may not be aware of when they register. These charges are called hidden or undisclosed charges, which may be one-time charges and may appear in small print on a contract. These fees are charged by various companies such as banks, credit cards, cell phone, cable and Internet providers, brokers and insurance companies, as well as those in the travel industry.
Hidden fees can cost consumers billions of dollars a year (and, in turn, make big profits for businesses) and are generally regulated at the state and federal levels. According to a 2020 report from the National Economic Council, these fees can often be misleading as they confuse the purchase price for consumers. The report says that costs have risen steadily in airlines, hotels and related industries.
Example of hidden charges
For example, a hotel may charge travelers $ 110 per night. But if you’re looking for a deal, you can opt for cheaper accommodation at another hotel for $ 100 per night. But there may be a service charge of $ 10 at the time of booking or even at a later date. These costs are generally not part of the advertised price.
Some hotels will justify these costs for facilities such as swimming pools or access to the gym. Even though the cost may be the same in the end, the rate of $ 100 per night can still be attractive to the consumer, despite the hidden fees.