The School Lunch Fee Racket

Consolidation and bundling leave parents with no option but to eat high fees.

Photo credit: DC School Lunch Kitchen

This is Boondoggle, the newsletter about how corporations rip off our states, cities, and communities, and what we can do about it. If you’re not currently a subscriber, please click the green button below to sign up. Thanks!

Parents are paying more for school lunches, not due to inflation or some other phenomenon affecting the price of square pizza slices or little chocolate milk boxes, but because of corporate consolidation and trickery. That’s the conclusion of a recent report from the Consumer Financial Protection Bureau, which found that school lunch processing fees are costing American families $100 million per year.

“Transaction fees and other types of junk fees can take an economic toll on American families just trying to pay for basic school expenses, including school lunch for kids,” said CFPB Director Rohit Chopra. “Today’s report will help school districts avoid contracts with financial firms that harvest excessive fees from families who purchase school lunch.”

I find the report interesting not just because of the headline number — though it’s a lot! — but because of why these school lunch fees exist. Much like high fees in many other sectors of the economy, school lunch processing fees are the result of: corporate consolidation, the bundling of services, and the opaque way in which many corporations generally, and online platforms specifically, operate.

The fees the CFPB examined are levied when parents put money into electronic accounts that their kids use to pay for lunch at school, so they’re akin to a bank processing fee or the cut of a transaction taken by a payment processing platform like Venmo. These fees average out to $2.37 for flat fees and 4.4 percent when levied as a percentage of the transaction.

For lower-income families in particular, fees can become a hefty percentage of the total lunch bill, reaching 60 cents for every dollar spent on actual, edible food. And many of the districts turning to these payment processors are either eliminating the ability of parents and kids to pay for lunch with cash entirely, or are, at the very least, discouraging the use of cash options, making electronic accounts a necessity.

Three factors come together to push fee prices up, per the report. The first is that the market for school lunch payment processing is very consolidated. While there are about 20 players in the industry overall, just three — MySchoolBucks, SchoolCafé, and LINQ Connect — cover about two-thirds of the student population. As in other industries, such as live events tickets and hotels, consolidation makes high fees easier to assess, as consumers have fewer options and players in the industry can tacitly collude to keep fees high even if consumers do shop around.

But the trick in the school lunch payment market is that the consumer is not the individual parent, but the school district itself, which brings us to our second factor: Bundling.

Parents certainly have no ability to go and use some other payment platform if a particular app is what their school leadership decided to use to facilitate lunch payments. As the CFPB put it, “Since payment platforms are typically provided without any up-frontcosts for school districts when included as part of a larger contract, school districts are not incentivized to prioritize low rates on fees that they will typically, in part or whole, pass on to end users. Families are only able to use the payment platform that their district has chosen, making it impossible to shop around for lower fees.”

Even that, though, overstates the choice available, because school districts often wind up with a particular payment processor because that service is bundled with a bunch of other ones covering various administrative tasks that schools need to keep running, such as HR management systems or food inventory software.

In nearly every instance, school lunch processing platforms are part of a larger corporation offering more wide-ranging services to school districts. Several of those parent corporations own more than one lunch payment processor, making the coordination of fees extremely easy.

But even absent that illusion of choice, this sort of tying together of products can help dominant corporations keep competitors out and fees high. And I get it: The convenience of a district having to only purchase or negotiate one contract is real, even if it results in fees trickling down onto parents. The CFPB noted that while some districts successfully negotiated lower fees with their payment processor, many other school administrators said they weren’t even aware that was an option, or believed their districts are so small they had no leverage to negotiate.

Finally, the third, and most insidious, factor keeping school lunch fees high is opacity and deception. According to U.S. Department of Agriculture rules, parents much be provided with a no-fee option when paying for school lunch. However, parents often do not know that alternative payment options exist, and neither the school district nor the payment processors are making much of an effort to tell them.

This dynamic reminds me of the tax-prep corporations like Turbotax, which are supposed to offer lower-income Americans free tax prep services, but make those services so difficult to find — through both lack of publicity and outright manipulation, such as labeling as “free” products that are most definitely not — that almost no one uses them.

School lunch payment processors also often fail to disclose the fee portion of the cost until the end of the transaction, when parents have already spent time and effort going through the process and are presumably loathe to start all over somewhere else or go searching for an alternative payment method. As the CFPB found, “Only 21 percent of sampled school districts explicitly disclose the fees associated with online transactions and no payment processors in the sample include specific information about potential fees on their website.”

So there’s a confluence of corporate power, inadequate transparency, genuine school district interest in saving time and money on administrative costs, and poor communication that all stew together to hit parents right in the wallet.

There are, of course, plenty of other issues in the school lunch policy space, including the debate over whether school meals should simply be universal, a cornerstone issue of Minnesota Gov. and current trendy vice presidential pick Tim Walz. But no matter how you slice the broader questions, parents should know what costs they’re agreeing to when they sign their kids up for school lunch and should not be gouged by fees they didn’t realize were on the menu.

---

SHAMELESS SELF-PROMOTION: I talked to Wired about a silly new corporate subsidy in New Jersey for “AI” and data centers, which you can read here, and spoke with Fortune about the economic records of the potential Democratic vice presidential candidates, which you can read here. (Fair warning, the Fortune piece treats large corporate subsidies as a “business friendly” positive, which, as you can likely imagine if you read this newsletter, is not my take.)

---

Thanks for reading this edition of Boondoggle. If you liked it, please take a moment to click the little heart under the headline or below. And forward it to friends, family, or neighbors using the green buttons. Every click and share really helps.

If you don’t subscribe already and you’d like to sign up, just click below.

Thanks again!

— Pat Garofalo