Bank executives were left panicking over the weekend after President Donald Trump announced late Friday that he would put a 10% cap on the interest rates that U.S. credit card companies can charge customers.
The move resulted in the transfer of stocks in major banks, including: citygroup, JP Morgan Chase, wells fargo and bank of america Shares fell between 1% and 4% in early trading on Monday. Companies more closely tied to the card industry: visa, master card and american expressalso fell. capital onewhose loan book is largely credit card, fell nearly 7%.
President Trump has proposed imposing a one-year cap on interest rates starting January 20th. It’s unclear how exactly it will be enforced, but the industry message is clear that the plan will have unintended consequences for consumers and the U.S. economy.
The move will make a significant portion of the credit card industry unprofitable, especially those related to customers with less-than-ideal credit profiles, banks and analysts said. As of this month, the average interest rate on credit cards nationwide is 19.7%, according to Bankrate.com’s weekly survey, but interest rates are higher for subprime borrowers and store-only cards.
Rather than offering consumers a loss-making product, the industry will not only stop providing access to customers with subprime credit, but also make a number of other changes to card programs, including reducing benefits, the people said. Consumers will either cut back on spending or rely on other forms of unsecured debt, many of which come with even higher interest rates than credit cards.
“We can’t offer products at a loss. There’s no scenario where we take the entire portfolio to 10%,” said a person familiar with a major bank’s operations, speaking on condition of anonymity to speak candidly. “The idea that this is going to cause the economy to deteriorate rapidly is not an exaggeration.”
KBW analysts led by Sanjay Saklani and Chris McGraty said in a Jan. 11 research note that the economic fallout from lower spending could be more severe for airlines, retailers and restaurants, which would have to offset the loss of card revenue through “potential price increases” on their services.
Industry trade groups issued a joint statement late Friday making their case.
“Evidence shows that a 10% interest rate cap would reduce credit availability and be devastating for the millions of American families and small business owners who rely on and value credit cards—the very consumers this proposal seeks to help,” the trade group said.
(LR) Charles Scharf, CEO and President of Wells Fargo, Thomas Moynihan, Chairman and CEO of Bryan Bank of America, Jamie Dimon, Chairman and CEO of JPMorgan Chase, Jane Fraser, CEO of Citigroup, and Ronald O’Hanley of State Street. – CEO Robin Vince of BNY Mellon, David Solomon, CEO of Goldman Sachs, and James Gorman, CEO of Morgan Stanley, testify at the Senate Banking, Housing, and Urban Affairs Wall Street Oversight Hearing Committee on December 6, 2023, at the Capitol in Washington, DC.
Saul Loeb | AFP | Getty Images
“Open the bid?”
This is not the first time the industry has faced potential price controls. Last year, Sen. Josh Hawley of Missouri and Sen. Bernie Sanders of Vermont introduced a bill that would cap annual interest rates on cards at 10% for five years.
The bill has been stalled in the Legislature, but a study of the Missouri market by the Electronic Payments Coalition found that more than 80% of card accounts would be inaccessible if interest rates were capped at 10%. Most accounts with credit scores below 740 will be closed, the study claims.
Complicating matters is the uncertainty for bankers about how President Trump’s interest rate cap will be set.
Tobin Marcus, head of U.S. policy at Wolfe Research, said the simplest approach, legislation through Congress, would not be possible by the proposed Jan. 20 start date.
Other enforcement avenues are also available through banking regulators, including the Consumer Financial Protection Bureau. But the Trump administration has repeatedly tried to shut down the agency, and the industry has successfully defeated CFPB rules in federal court.
“I’m not aware of any authority they have available to do this unilaterally in any across-the-board way,” Marcus said. “As far as I’m concerned, telling people they have until January 20th is an attempt to pressure them into doing it voluntarily.”
KBW’s McGratty said in an interview that while the exact mechanism President Trump could use to enforce the interest rate cap is unclear, card issuers now face the risk of lower interest rates through some kind of compromise negotiation with the government.
“Is the opening price 10%?” he said. “There’s a huge difference between 10% and today’s corporate rates.”
As of the third quarter of last year, Americans had $1.23 trillion in credit card debt, according to data from the New York Fed. Balances are rising as many Americans have used up the savings they built up during the coronavirus pandemic.
Correction: This story has been updated to correct the spelling of Capital One.
