Recently, President Donald Trump cheered many self-styled consumer advocates by saying that credit card interest rates should be capped at 10%, and later gave his backing to a proposal aimed at curtailing the power of Visa and Mastercard. Both proposals would in fact harm the very consumers they are intended to help, but their negative effects would go further. States like Georgia that rely on the travel industry would be badly affected, and one of the Peach State’s signature employers would particularly suffer.
Capping card interest rates is a simple study in supply and demand. Many secured loans charge an interest rate higher than 10%; unsecured loans like credit cards charge higher rates out of necessity. By making it unprofitable to lend to higher risk consumers, such an interest rate cap would restrict supply of credit while leaving demand unaffected. That demand would go to payday lenders and other forms of credit that will almost certainly charge even higher fees or collateral, like pawn shops do. Some of the demand would even be catered to by criminals. Credit cards both democratized and legalized access to credit, with credit card usage increasing fourfold since just 2000, and it would be a severely retrograde step to throw away that achievement.
The other proposal, the Credit Card Competition Act (CCCA), seeks to lower the fees paid by merchants every time someone uses a card. At the moment, banks tend to prefer Visa and Mastercard because they have invested heavily in security and protection for banks and consumers. For example, consumers typically are not held liable for fraudulent purchases made when a criminal steals their credit card number. The CCCA would mandate a choice between one of the established networks and other competitors, which are likely to compete not on security and soundness, but on price, which will be much more attractive to the merchants.
The problem is that history has shown that when merchants get lower fees, they do not pass on the savings to consumers. So, consumers will face the same prices and get less protection when someone steals their card details. Moreover, because the banks get less revenue, they will cut features like rewards and no annual fees first. Consumers will pay more and get less protection, and that will hurt people on the margins the most.
While rewards may seem unimportant, they are actually a significant part of banking as well as the travel industry. Consumers use miles and points extensively to take vacations, and states like Georgia benefit tremendously from them. A study by Airlines for America found that airline credit card rewards supported over 385,000 travelers, 5,690 jobs and more than $650 million in economic activity in a single year. That’s activity that ripples through airports, restaurants, shops and tourism attractions like the Georgia Aquarium.
A study by Oxford Economics Research suggests that the CCCA could cost the American economy $227 billion and cause 156,000 people to lose their jobs, as the law would not just destroy rewards programs, but significantly reduce the amount of credit available. Remember that Sergey Brin and Larry Page founded Google by maxing out their credit cards. No credit cards, no Google.
This would significantly impact one of Georgia’s marquee employers: Delta Airlines. Delta’s financial reports make it clear that without the revenue gained from selling its popular SkyMiles to banks, the airline would often operate at a loss. Take that revenue stream away, and that’s a recipe for fewer flights and higher prices. Airlines are notorious as an industry for their razor-thin margins. The last thing Congress should be doing is cutting off a reliable revenue stream.
These attacks on the credit industry are another example of economic populism at its worst. Everyone hates high interest rates. Merchants hate paying fees the consumer doesn’t see. Yet people would hate losing their credit cards. Merchants might frown when consumers stop buying their products at all. Our forefathers had a phrase: Better the devil you know. That’s worth remembering, even when the devil charges a 20% interest rate.