Price Controls Rarely Work. The Free Market is a Better Option.
There have been multiple proclamations from various policymakers regarding the need to cap credit card rates. Unfortunately, forcing credit card issuers to cap interest rates charged to users will accomplish little good while harming underserved markets and those most at risk and in need of credit. Effectively, these individuals are promoting price controls by controlling the cost of credit.
Everyone gets it. Credit card interest rates are ridiculously high. The best option is to avoid expensive credit cards and pay with cash or use a debit card. Unfortunately, there are times when credit is necessary, and the convenience of a credit card makes it a compelling option to cash.
In an Op-Ed co-authored by Senators Bernie Sanders and Josh Hawley, the unlikely duo promoted a move to cap credit card interest rates at 10%. Describing the existing environment of “usury” by banks that are getting rich on consumers with these high fees, banks are little more than loan sharks in the eyes of the two Senators, who are using robinhood logic.
So if credit card rates are capped at 10%, will everyone go away happy while the banks make less money? Probably not.
Interest rates charged for the convenience of using a credit card are typically priced based on risk. Cardholders with good credit pay a lower rate, and risky cardholders pay more. The wealthy may pay zero interest as they pay off those monthly balances.
The probability of default and the potential need for recovery moves higher when dealing with risky individuals or less credit-worthy individuals. If interest rates are capped at 10% in a variable interest rate environment where rates are constantly changing, many consumers will simply be cut out of the credit card equation. This could mean more business for the corner Check Cashing operation or, potentially, yes, the loan shark business.
If credit card issuers are hobbled as they change to manage risk, competition could step in – most likely in the form of BNPL or buy now pay later providers, who are already challenging the credit card market. BNPL credit can be less costly than expensive credit cards. These services are frequently made available at the point of sale. BNPL platforms emerged not because of federal legislation and government commandments but because entrepreneurs saw an opportunity to tackle an existing market and make it more efficient.
Congress could tackle the byzantine fees charged by credit card companies. Typically, a card company charges up to 3% plus a flat fee for using their payments rails. While the merchant pays these fees, you know they are being passed onto the consumer.
While there is no expectation that Senator Sanders will understand a market economy as he does not believe in them, Senator Hawley should. If the government seeks to control pricing, the market will react – most likely by creating a shortage of credit. Perhaps Senator Hawley should look at boosting credit competition instead of curtailing it. The Senator could work to forward stablecoin legislation that may enable immediate and inexpensive transfers and payments. Maybe some of these stablecoin innovators will see an opportunity to compete with legacy credit card issuers, providing credit at a lower price with better service. This would be better for consumers.