PETERBOROUGH, N.H.—If a 10% cap on credit card interest rates were mandated, issuers would have to eliminate rewards and brace for the fact their card programs would become “near-trivial” as profit drivers, one payments analyst is saying.
And, at the very least, the proposed 10% cap on credit card interest rates is a sign that issuers need to be ready for “disruptions” to their card programs, said Tim Kolk, principal at TRK Advisors.
As CUToday.info reported, what was once considered Donald Trump campaign rhetoric—a 10% cap on credit card interest rates—has now been proposed by Sens. Bernie Sanders (I-VT) and Josh Hawley (R-MO). As CUToday.info reported, Trump made headlines in September by promising a crowd in New York he would place a temporary 10% cap on credit card interest rates if he was elected.
“Credit card issuers should at least keep an eye on this, as it is not impossible that this could happen,” said Kolk, casting doubt, however, on the bill being signed into law. “Issuers, today, always need to be ready for shocks to the credit card system. That might mean interchange regulation, a disruption to the payment networks from some new technology, or it might include regulation like this 10% cap. Even if the chances of something like this passing are low, you have to be ready. You can’t get caught on your heels when you have those who are very attuned to possibilities reacting faster and gaining advantages.”
Kolk said he is not surprised the Trump campaign promise has translated into a legislative proposal, outlining how consumers and issuers would be affected if the bill passed.
Two Scenarios
“I see two possible scenarios,” Kolk said. “The more likely one is issuers can maintain existing balances at existing rates subject to current CARD Act rules on paydown. But new balances and new accounts have to come in at the lower rate.”
Kolk said most consumers would no longer qualify for unsecured credit cards and many existing cards would be closed.
“The overall economy would, in the near term, show the impacts tens of millions of consumers losing their ability to charge what they used to,” he said. “Existing credit cards would likely lose their rewards in all cases, with, possibly, the exception of the highest spend, high annual fee, high-end card category—where a large majority of cardholders do not revolve balances. Middle-market cards would suffer a combination of new annual fees and loss of rewards.”
Kolk also projected the “charge-card,” pay in full each month, would probably make a comeback.
“The airline, and to some extent the hotel sectors, would likely see significant secondary effects as issuers will no longer be able to support rich reward programs and buy hundreds of millions of dollars of points, which are important to the overall profitability of those sectors. Especially in times of stress,” Kolk explained.
Kolk outlined a less-likely scenario in which issuers are obligated to immediately reduce rates on existing balances.
“All of what I previously forecast would happen, and then just add chaos in the banking market,” Kolk said. “Especially with the largest bank issuers, to the extent their card businesses are a significant driver of overall bank performance—so Chase, Amex, Discover, Citi, Capital One…”
Tim Kolk
Kolk said the 10% cap would lead issuers to address the question of how many middle-market consumers would be willing to pay annual fees to have a credit card without rewards.
“That is certainly far fewer folks than have cards now, and probably the largest issuers will be best at finding those folks and having the scale to survive the attrition that will happen across the industry,” he said. “Some smaller issuers will maintain a simple 10% card. They will have some customers/members that will qualify, but if their profitability math is right, that won't be too many. Their card businesses will become near-trivial as a profit driver.”
Dramatic Reductions In Volume
Kolk said a secondary effect would be issuers’ processing organizations would see dramatic reductions in volume.
“Which means dramatic reductions in revenues,” he added. “They have significant fixed cost structures, but get paid largely on volume. They will be badly damaged, leading to problems maintaining their support and servicing infrastructures. Over time, smaller issuers would lose competitive functionality to the largest issuers, which is already a struggle.
“I guess there is always the chance the bill could be passed, as now there is legislation,” said Kolk. “In my opinion, the odds of this increase if we head into a significant recession, and Washington needs to assuage everyday Americans.”