Major US banks have lashed out at Donald Trump’s proposal to cap credit card interest rates to address affordability concerns, warning the move could undercut a crucial source of industry revenue.
JPMorgan, Citigroup and Wells Fargo this week separately said limiting borrowing costs on credit cards would harm their business model in a way that would make it prohibitive for them to extend credit to some borrowers, claiming it could hurt economic growth as a result.
The backlash comes after the president said he would introduce a one-year 10 per cent cap on credit card interest rates as part of a push to ease borrowing costs on consumers amid growing pressure to fix domestic affordability issues ahead of midterm elections later this year. Trump’s latest push follows months of relentless but fruitless pressure to have the Federal Reserve rapidly and dramatically lower US borrowing costs.
Mark Mason, Citigroup’s chief financial officer, on Wednesday said such a cap would cause “a restriction on providing credit in the market to those who need it most because of the economic impact to the business model of this industry”. This would have “unintended consequences on the consumer” and likely result in a “significant slowdown on the economy”, he added.
Mason’s comments echo similar feedback from peers. Mike Santomassimo, CFO of Wells Fargo, on Wednesday said: “There would be significant negative impact of credit availability for a wide spectrum of people, and it would have a negative impact on economic growth, if this type of cap was mandated.”
In a Truth Social post last week, Trump said his administration “will no longer let the American Public be “ripped off” by Credit Card Companies that are charging Interest Rates of 20 to 30%.”
Credit cards account for 70 per cent of all US retail payments, according to a report from the Federal Reserve of New York, while the average credit card rate is 19.6 per cent as of this month, according to Bankrate.com.
Trump’s announcement was part of measures designed to ease living costs for Americans. It came after the president announced a $200bn government purchase plan of mortgage-backed securities designed to lower mortgage rates and another proposal to ban institutional investors from buying single-family homes.
“He is throwing spaghetti against the wall with ideas that sound more like Bernie Sanders,” said Aaron Klein, senior fellow in Economic Studies at the Brookings Institution. The leftwing Vermont senator last year introduced a bill to cap credit card interest rates at 10 per cent, an idea also backed by Democratic senator Elizabeth Warren. The legislation has since stalled in Congress.
While Trump floated the idea for a credit card cap on the 2024 campaign trail, his first year in office largely focused on easing banks’ capital requirements and gutting the Consumer Financial Protection Bureau.
“In some sense it’s a pivot back to what [Trump] had previously said,” said Brian Shearer, director of competition and regulatory policy at Vanderbilt Policy Accelerator. “The political context is that everyone is talking about affordability.”
Shares in credit card companies including Capital One, American Express and Citigroup declined on the back of the news.
Jeremy Barnum, CFO of JPMorgan, said “everything’s on the table” — including possibly a legal challenge — to fight the proposal if it were to materialise, which he described as “weakly supported directives to radically change our business that aren’t justified”.
Brookings’ Klein agreed a 10 per cent cap would “reduce credit availability” and push people towards less-regulated lending products, as well as hurt small businesses, which are “typically financed by credit cards and home equity, particularly at the beginning”.
Others argue the industry’s concerns are overblown. Shearer, who authored a Vanderbilt study on the potential effects of a 10 per cent cap, said such a move would “certainly reduce credit card bank profits but not so much that it would contract lending in any meaningful way”.
Shearer, who was assistant director for policy planning and strategy at the CFPB, said the industry could absorb a huge rate cut because of excess profits, which it also makes from interchange fees. While lending to some lower credit-score customers could become unprofitable under the cap, banks could make up for it by contracting some of their reward offers, Shearer argued.
A NY Fed study found deducting operating expenses, credit card lending earns a 6.8 per cent return on assets, more than four times the metric for the wider banking sector.
Klarna CEO Sebastian Siemiatkowski also backed Trump’s plan, which would not affect his company’s interest-free buy now, pay later loans. He argued similar caps have been put in place in other markets including Portugal, the Netherlands and France — at rates ranging from 12 per cent to 24 per cent — without distorting the market.
“It’s a pretty broken system and I think Trump accurately is calling that out and challenging that,” Siemiatkowski said. “To some degree, at some interest rates, you have to ask yourself, should you even be borrowing money? Is this even going to end up well?”
Policy experts are sceptical the president can single-handedly force the industry’s hand on this, given such a move would require legislation.
While the idea has some bipartisan support, it is likely to face strong opposition within Trump’s party. Republican Speaker of the House Mike Johnson has poured cold water on the idea. On Tuesday he said it was a “complicated area” and a “lot of work” would be required “to build consensus around it” in order to pass legislation.
Trump’s push to lower consumer borrowing rates appears to constitute one way to influence monetary policy as the White House is locked in a power struggle with the Fed.
Jai Kedia, research fellow at the Cato Institute think-tank, said: “The president knows [high borrowing costs] are going to be an important part of the election aspect, which is why he’s trying to bring down the cost of borrowing, by reducing the price of money.”
Additional reporting by Joshua Franklin in New York and Lauren Fedor in Washington
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