Retailers Face Hidden Exposure From a 10% Credit Card Rate Cap

A 10% cap on credit card interest rates would have a significant impact on certain businesses that allow their customers to make credit card payments, according to a new report from American Banker.

President Donald Trump’s call for a 10% cap on card interest rates for one year is less than a month old. Over the past few weeks, much of the analysis regarding which how a cap would affect stakeholders has centered on credit card issuers and regular credit card holders.

Brian Doubles, CEO of Synchrony, spoke about the cap on the company’s earnings call at the end of January. His comments revealed that U.S. retailers that offer store-branded credit cards may face severe financial effect if a 10% cap moves forward.

“We support 400,000 small-to-medium-sized businesses who depend on those credit programs,” Doubles said, according to American Banker. “In some cases, we can be over 40% of their sales. So this would be a huge hit for them.”

Synchrony partners with smaller brands on the credit programs it offers, but it also works with some of the largest retailers in the U.S., including Amazon and Walmart.

Synchrony partners with a variety of retailers, including smaller brands and industry leaders such as Amazon.

The remarks from Doubles may help draw attention to the fact that retailers with store-branded credit cards stand to lose from a 10% cap. But Doubles may have had his company’s future earnings in mind when he spoke about the cap.

The report indicated that analysts from Morgan Stanley recently wrote in a research note that — outside of Bread Financial Holdings — a 10% cap on card rates would harm Synchrony more than any other lender. Bread Financial Holdings also issues store-branded credit cards.

One need look no further than the performance of Synchrony’s stock to see how the market is valuing the company in recent weeks.

On Jan. 9, the morning before Trump’s call for a 10% cap on card interest rates, Synchrony’s stock price opened at $88.21. At the close of trading on Jan. 30, the stock’s price had fallen to $72.63. 

With retailers set to face losses should a 10% cap move from the idea stage to implementation, industry insiders may wonder why trade groups that support retailers haven’t made more noise about the harm a cap could bring.

After all, associations that represent banks and credit unions, including the American Bankers Association and the Independent Community Bankers of America, wasted no time in issuing a statement in response to the proposed 10% cap.

“Evidence shows that a 10% interest rate cap would reduce credit availability and be devastating for millions of American families and small businesses who rely on and value their credit cards, the very consumers this proposal intends to help,” the groups wrote.

But retail trade groups have stayed relatively silent in the aftermath of the proposal, the American Banker reports.

One reason those groups haven’t been as busy as bank associations in responding is that a cap may help some retailers. Merchants enjoy the convenience and security that credit cards bring to their businesses, but many of them could do without the fees they pay when customers use them.

Associations representing the interests of retailers haven’t been as vocal as banking groups in opposing a 10% cap on credit card interest rates.

Some merchants have even taken to charging customers who pay with credit cards an additional fee in hopes that they will switch to another method of payment. But placing surcharges on credit card transactions can cause a business to lose out on sales.

A 10% cap could cause people to lose access to their favorite credit cards, which would lead to different outcomes for larger businesses than smaller ones, Rhett Roberts, Co-Founder and CEO of LoanPro, told us.

“Many big box retailers have alternatives in place already, like integrated BNPL at checkout,” Roberts told us. “Still, if consumers are facing a liquidity crunch, spending is likely to go down. Midsize businesses may see greater effects of a liquidity crunch since they won’t have alternatives readily available.”

Credit card issuers could trim rewards programs and lower limits for the majority of their current cardholders in a post-cap environment. Lower limits on cards may force consumers to make hard decisions on how to use their purchasing power.

Bruce Brenkus, SVP of Risk at Flote, said that the biggest risk merchants stand to face is that they won’t sell their inventory.

“When limits drop, customers hesitate to buy,” Brenkus told us. “If someone’s limit falls from $5,000 to $1,000, they won’t buy large items like appliances or furniture. Merchants could be left with stock that their main customers can’t afford.”

Experts agree that a cap on card rates could lead to fewer sales, but it may also cause businesses problems regarding items customers have already purchased.

“There might be an immediate wave of returns and cancellations as card programs close, followed by a sluggish recovery while consumers recalibrate their cash flow, liquidity, and budgeting,” Rhett told us. 

Retailers may see a surge in returns if a cap causes cardholders to lose access to their credit cards.

Some merchants may hope to see the cap move forward if that means their customers will spend at the same rate but simply reach for cash rather than a credit card when completing a purchase. 

But Jeremy Layton, CEO of Verisave, a company that brings optimization to merchant accounts, told us that whether consumers replace cards with cash to completie purchases is difficult to predict.

With a 10% cap on interest rates in place, businesses that issue store-branded credit cards could see fewer sales in their stores and lower income from their card programs.

Brenkus said that co-branded and private-label credit cards are important to the loyalty programs of many large retailers. Under a 10% cap, they would see cuts to credit lines or card cancellation.

“The result would be a significant contraction of those portfolios, leading to less available credit, fewer financed purchases, and weaker loyalty dynamics tied to those programs,” Brenkus told us. “In the end, the cap puts at risk not just retailer profits but also the customer engagement systems that many merchants depend on.”