Senators from both sides of the aisle claim they are taking on big banks to help the working class by regulating credit cards. Sen. Josh Hawley (R-Mo.) wants to impose a cap on credit card interest rates. Sen. Dick Durbin (D-Ill.) wants to force banks to offer a choice of network over which credit card payments flow. Neither would help working-class consumers – and would almost certainly cost them, as well as numerous smaller banks and credit unions that offer their customers credit cards.
Everyone except the very rich or the exceptionally self-disciplined needs access to credit at various times. That is why most people have at least one credit card in their wallet. Obviously, credit comes at a cost because it costs a lender something to extend a line of credit. While these bills aim to reduce cost to consumers, it is likely new laws will end up imposing a much higher cost – the denial of credit to those who need it and a reduction in the security of payments.
In the case of Hawley’s bill, the Capping Credit Card Interest Rates Act, it is crucial to understand that there are only three ways banks and credit unions can make money from offering credit cards to their customers: consumer fees for the cards, interest rates, or fees levied on merchants who accept the cards. Interest rates are the main way banks can assess the risks of default or late payments from consumers. If you have a low credit score, your base rate will be higher; if you miss payments, your rate will go up.
Capping interest rates would simply mean that these costs would be transferred elsewhere – either to merchants who will pass on their higher fees to consumers (and merchants hate the fees they are charged anyway, as we shall see) or to the consumers in the cost of card fees. If consumers have to pay more in fees, that will almost certainly price some people out of the market.
We have seen when fee caps were introduced on other loan products that it was working class and particularly minority consumers who bore the brunt – finance companies simply stopped offering the products to many in these categories. Lawmakers in Hawley’s Missouri have recognized this economic reality and have refused to follow neighboring Illinois in enacting stringent interest rate caps on small-dollar loans. Researchers from the Federal Reserve and Mississippi State University found loan growth (26 percent) to subprime borrowers in Missouri far surpassed that in Illinois (14 percent) in the aftermath of Illinois’ disastrous price control legislation.
On the other hand, Durbin’s bill – the perversely misnamed Credit Card Competition Act — is an attempt to reduce the costs to merchants. His bill forces banks and credit unions to offer two choices of payment networks to merchants, only one of which can be Visa or Mastercard.
Payment networks compete not just on price but on quality. The big brand names like Visa or Mastercard offer very high quality to both banks and consumers, including security and fraud protections. Smaller networks, which would be the prime beneficiaries of this bill, tend to compete on price and, therefore, do not offer the same level of security. Consumers will find that features like card blocks they depend on when a card goes missing are no longer available. Once again, working-class consumers would bear the brunt.
One other effect of both of these bills is that they would devastate card rewards programs. Rewards to consumers would be the first thing that gets cut as banks try to make up lost revenue. We saw when Durbin snuck through a cap on debit card fees in the Dodd-Frank bill that debit card reward programs just disappeared. That is likely to repeat itself if either or both of these bills get passed.
But there is an even more serious angle here – many airlines have structured large parts of their business models around cobranded credit cards with banks. They sell large amounts of air miles to banks, who offer them as rewards. If that disappears, then airlines, as well as banks, will need to make up the revenue.
They will do that in the only ways they can – higher prices, fewer flights, and more crowded planes. Once again, it is the working-class airline consumer who would suffer the most. And if flights are more expensive and less comfortable, more people will travel by road, where the chances of them being in a serious or deadly accident are much higher. The costs of these bills would not just be financial.
Senators looking to help the working class lower their bills should not forget a central lesson of economics – always look at all the effects of a change rather than just the immediate effects. If they did that, they would realize the costs they are creating for working-class consumers and would withdraw their bills.