Patchwork Rate Caps Threaten Card Revenue Models

Leaders at credit card companies may have felt sick to their stomachs when they first read President Donald Trump’s social media post calling for a 10% cap on credit card interest rates. After all, a cap may not only force credit card issuers to rein in popular card benefits, but it could also cut off access to credit for many consumers in the U.S.

A cap on card interest rates may not gain much momentum at the federal level anytime soon. But issuers may one day wish that it had moved forward if a recent proposal from a group of Democratic senators picks up steam. 

Senators Jeff Merkley (D-OR), Jack Reed (D-RI), Elizabeth Warren (D-MA), and Sheldon Whitehouse (D-RI) introduced a bill, the Empowering States’ Rights to Protect Consumers Act, that would give states the power to restrict rates on consumer loan products.

The bill has credit card interest rates in its crosshairs, Warren made clear in a press release.

“Americans are struggling under mountains of credit card debt with astronomically high interest rates of 25, 30, even 35%,” Warren said. “Congress must act to bring down those interest rates at a federal level, but it’s also critical that states have the ability to deliver relief.”

America’s Credit Unions posted a response to the Empowering States’ Rights to Protect Consumers Act that highlights the negative impacts that state-by-state rate caps would cause.

And Whitehouse stressed that the bill would help consumers get more breathing room on their monthly credit card bills.

But the legislation stands to create more than a few problems for credit card companies. Earlier this month, America’s Credit Unions came out against the bill and the situation it would create for stakeholders in the credit card industry.

“Credit unions share the goal of helping Americans manage debt and improve their financial well-being, but creating a patchwork of state-by-state interest rate caps is not the right solution,” Scott Simpson, President and CEO of America’s Credit Unions, said in a post on the group’s website.

“This approach would create a fragmented lending system, increase compliance complexity, and ultimately reduce the availability of responsible, lower-cost credit offered by not-for-profit credit unions,” Simpson added.

The complexity America’s Credit Unions made reference to could cause a lot of work for compliance officers at credit card companies. Alex Vasylenko, Founder of Digital Business Card, told us that states setting rate caps would also lead to extra expenses for issuers.

“A segmented interest cap will increase operational costs as card programs require more control over solicitation, pricing, disclosure, servicing, and credit line management based on resident status,” Vasylenko said.

He added that a segmented cap could also lead to more audits and legal reviews for card programs.

If certain states do move forward with limiting interest rates, card companies will likely be watching closely to see if those states choose to cap rates at the same point. Issuers are likely to have a much easier time figuring out how to comply with an environment where states either set rate caps at the same level, such as 20%, or they don’t set them at all.

In late January, a state senator in Arizona introduced a bill that would cap interest rates on credit cards at 15%. That figure is 50% higher than the rate Trump proposed on social media.

A cap on interest rates could stifle innovation in the card arena.

Regardless of the rate cap lawmakers ultimately land on, card companies stand to see substantial drops in revenue. Vasylenko told us if issuers face restrictions in generating interest income, they may seek to lower the value of rewards programs and charge more in annual fees.

A cap on card interest rates, whether at the state or federal level, could also affect innovations in payments. Guillaume Bouvard, Co-Founder, Chief Operations Officer, and Chief Marketing Officer at Extend, told us about the implications a cap could have on a financial institution’s ability to innovate.

“Interest revenue plays a critical role in offsetting credit losses and funding ongoing investments in customer service, compliance, and digital infrastructure,” Bouvard said. “In particular, banks’ investment capacity in innovation will be reduced drastically, as these initiatives are usually funded last.”

A cap on credit card interest rates could have disastrous consequences for credit card companies, limiting their ability to offer benefits on card programs and preventing them from extending credit to as many consumers and businesses as they’d like to.

But allowing states to set their own caps could be much messier for issuers because — instead of ensuring their programs comply with one cap — they would have to follow many different interest rates.