WEBVTT - Banks Really Hate Trump’s Credit Card Proposal 0:00:02.720 --> 0:00:08.200 Bloomberg Audio Studios, podcasts, radio news. 0:00:09.160 --> 0:00:12.200 President Donald Trump was front and center at the World 0:00:12.240 --> 0:00:16.280 Economic Forum at Davos this week with an unprecedented and 0:00:16.360 --> 0:00:19.640 winding speech on Greenland, Europe, and NATO. 0:00:19.880 --> 0:00:24.640 It's great to be back in beautiful Davos, Switzerland. 0:00:25.400 --> 0:00:27.560 If you haven't heard it, We've linked our episode on 0:00:27.560 --> 0:00:30.520 Trump's case for why the US should take over Greenland 0:00:30.920 --> 0:00:35.640 and NATO and Europe's response in our show notes. Trump's 0:00:35.640 --> 0:00:38.600 speech also included a nod to a key issue for 0:00:38.720 --> 0:00:41.080 many Americans, affordability. 0:00:41.280 --> 0:00:43.600 One of the biggest barriers to saving for a down 0:00:43.640 --> 0:00:46.920 payment has been surging credit card debt, and. 0:00:46.920 --> 0:00:50.800 A return to an idea from his presidential campaign capping 0:00:50.920 --> 0:00:53.080 interest rates on credit cards. 0:00:53.120 --> 0:00:56.440 The profit margin for credit card companies now exceeds fifty 0:00:56.480 --> 0:01:00.680 percent one of the biggest, and they charge America interest 0:01:00.760 --> 0:01:05.080 rates of twenty eight percent, thirty percent, thirty one percent, 0:01:05.200 --> 0:01:06.280 thirty two percent. 0:01:06.600 --> 0:01:09.479 He went on to announce he's asking Congress to cap 0:01:09.560 --> 0:01:13.000 credit card interest rates at ten percent for one year. 0:01:13.200 --> 0:01:16.720 This director from Trump is targeting banks crown jewels, and 0:01:16.760 --> 0:01:19.679 that really is what credit cards are to a lot 0:01:19.720 --> 0:01:22.640 of these really profitable banks in the US. 0:01:22.920 --> 0:01:26.120 Claire Ballentine is a finance reporter for Bloomberg News. 0:01:26.360 --> 0:01:29.720 We just had bank earning season, and the banks have 0:01:29.880 --> 0:01:33.959 spoken out against it, and we've even seen certain bank 0:01:34.080 --> 0:01:38.040 CEOs say that, you know, it could potentially even cause 0:01:38.440 --> 0:01:42.320 a recession if Trump imposes this executive order. 0:01:43.160 --> 0:01:46.680 The lack of credit would result in greatly reduced consumer 0:01:46.720 --> 0:01:49.640 spending and would likely bring on a recession. 0:01:49.880 --> 0:01:52.880 That was the Capitol One ceo said that this week. 0:01:53.000 --> 0:01:56.120 So banks really hate it, but yeah, I mean, credit 0:01:56.200 --> 0:01:59.920 card debt is a huge issue for a lot of Americans. 0:02:03.840 --> 0:02:06.240 I'm Sarah Holder and this is the big take from 0:02:06.240 --> 0:02:10.680 Bloomberg News today on the show, what Trump's proposed cap 0:02:10.760 --> 0:02:14.639 on credit card interest rates could mean for banks and 0:02:15.040 --> 0:02:17.440 would it help or hurt borrowers. 0:02:22.080 --> 0:02:24.880 A lot of Americans have credit card debt. The reason 0:02:24.919 --> 0:02:26.840 that a lot of credit card debt is so harmful 0:02:26.840 --> 0:02:30.680 for Americans is the high interest rates that come with 0:02:30.800 --> 0:02:31.720 a carrying of balance. 0:02:32.040 --> 0:02:35.280 According to the Federal Reserve, the average credit card interest 0:02:35.360 --> 0:02:37.880 rate was around twenty one percent last year. 0:02:38.080 --> 0:02:40.040 If you pay your card off every month, you don't 0:02:40.120 --> 0:02:42.560 have a balance, but if you do, there's a really 0:02:42.639 --> 0:02:43.919 high interest rate for it. 0:02:44.240 --> 0:02:46.720 The card Act, which was passed in two thousand and nine, 0:02:47.120 --> 0:02:51.120 protects cardholders from sudden rate hikes and hidden fees, but 0:02:51.480 --> 0:02:55.000 as it stands, there's no federal law limiting the rates 0:02:55.160 --> 0:02:59.160 lenders can charge. Usury laws, which exist at the state 0:02:59.240 --> 0:03:03.639 level cap interest rates, but they vary greatly, and since 0:03:03.680 --> 0:03:06.400 they often apply to where banks are headquartered and not 0:03:06.480 --> 0:03:10.360 where cardholders live, consumers might still end up paying a 0:03:10.440 --> 0:03:13.840 rate higher than their state's cap. The result is a 0:03:13.880 --> 0:03:18.880 patchwork system of protections an amounting debt burden on American consumers. 0:03:19.720 --> 0:03:22.840 In the third quarter of twenty twenty five, US bars 0:03:22.840 --> 0:03:26.600 were carrying a record one point two to three trillion 0:03:26.680 --> 0:03:28.839 in credit card debt. That's according to the New York 0:03:28.840 --> 0:03:32.640 Federal Reserve. And it's really easy for this kind of 0:03:32.680 --> 0:03:36.720 thing to spiral with interest rate payments. And there's one 0:03:36.760 --> 0:03:40.400 study from Vanderbilt that says that capping interest rates at 0:03:40.400 --> 0:03:43.560 ten percent could reduce consumer interest payments by more than 0:03:43.720 --> 0:03:45.360 one hundred billion a year. 0:03:45.840 --> 0:03:49.120 Right now, credit card issuers, which are tied to banks 0:03:49.400 --> 0:03:53.440 set the interest rates on their cards. JP Morgan, Chase, City, 0:03:53.480 --> 0:03:56.480 and Capital One account for nearly eighty percent of the 0:03:56.560 --> 0:04:00.040 US credit card market. By credit and charge volume, and 0:04:00.120 --> 0:04:03.560 Claire says collecting interest is a fundamental part of their 0:04:03.600 --> 0:04:08.200 business and a very profitable one. That's why proponents of 0:04:08.240 --> 0:04:11.120 capping interest rates think there's room to lower rates and 0:04:11.200 --> 0:04:15.560 still allow the banks to make money. Banks see things differently. 0:04:16.000 --> 0:04:19.359 So the reason that credit card interest rates are so high, 0:04:19.839 --> 0:04:23.440 banks would argue, is because you're borrowing money. When you're 0:04:23.440 --> 0:04:27.000 carrying a balance on a credit card, that's not your money, 0:04:27.040 --> 0:04:30.640 but you're supposed to pay it back. And unlike with 0:04:31.320 --> 0:04:34.400 a loan, you know, say like a house or a car, 0:04:34.920 --> 0:04:38.120 where if you don't pay it, banks can repossess it. 0:04:38.200 --> 0:04:41.080 You can have a car taken away, a home taken away. 0:04:41.720 --> 0:04:44.760 With credit cards and putting money on credit cards, there's 0:04:44.760 --> 0:04:47.200 no way for them to do that. So that's why 0:04:47.680 --> 0:04:50.320 banks argue that the rates have to be as high 0:04:50.360 --> 0:04:56.400 as they are. Various stakeholders can argue with how high 0:04:56.400 --> 0:04:59.040 it is, if they really need to be that high, 0:04:59.360 --> 0:05:01.240 you know, a banks could still make a profit with 0:05:01.279 --> 0:05:04.560 a slightly lower interest rate. That is all really in 0:05:04.600 --> 0:05:07.560 the in the zeitgeist of conversation right now, but in 0:05:07.680 --> 0:05:10.560 general it's a big part of banks business model, and 0:05:10.680 --> 0:05:13.520 you know, for consumers that have. You know, these fancy 0:05:13.520 --> 0:05:16.640 credit cards that give them perks like airline access and 0:05:16.680 --> 0:05:19.680 things like that. These high interest rates on cards are 0:05:19.680 --> 0:05:23.200 a lot of the ways that those things are able 0:05:23.240 --> 0:05:25.719 to be offered. You know. Some of these CEOs have 0:05:25.800 --> 0:05:28.640 come out and said that doing this and hurting banks 0:05:28.680 --> 0:05:33.839 profitability and potentially reducing credit access to consumers could be 0:05:33.839 --> 0:05:35.240 a real negative for the economy. 0:05:36.320 --> 0:05:39.440 JP morgan Chase, for instance, said its credit card interest 0:05:39.560 --> 0:05:41.880 rates drove the bulk of the banks twenty five and 0:05:41.880 --> 0:05:45.160 a half billion dollars of revenue for its card services 0:05:45.200 --> 0:05:48.680 and auto unit in twenty twenty four. A ten percent cap, 0:05:48.760 --> 0:05:52.560 the bank said, could significantly change its card business and 0:05:52.640 --> 0:05:53.720 be bad for consumers. 0:05:53.920 --> 0:05:57.960 It would be a economic disaster. And I'm not making 0:05:58.000 --> 0:05:59.880 up because our business, you know, we would survive that. 0:06:00.160 --> 0:06:04.240 JP Morgan Chase CEO Jamie Diamond at Davos earlier this week. 0:06:04.120 --> 0:06:06.600 In the worst caste of they have a drastic reduction 0:06:07.000 --> 0:06:09.040 of the credit card business. I mean drafted, I mean 0:06:09.080 --> 0:06:11.560 like ten percent, I mean like eighty percent. It would 0:06:11.560 --> 0:06:14.479 remove credit from eighty percent of Americans, and that is 0:06:14.480 --> 0:06:15.520 their backup credit. 0:06:15.880 --> 0:06:18.240 A trade group for banks puts the number of people 0:06:18.240 --> 0:06:22.000 who could be impacted much lower, though it's still significant. 0:06:22.440 --> 0:06:26.039 The Bank Policy Institute estimates around fourteen million people and 0:06:26.120 --> 0:06:29.760 families could have their credit lines eliminated or reduced if 0:06:29.760 --> 0:06:31.560 a ten percent cap is introduced. 0:06:31.880 --> 0:06:33.920 This all goes back to this idea that you know, 0:06:34.000 --> 0:06:38.320 banks aren't going to lend unprofitably and not being able 0:06:38.400 --> 0:06:42.680 to charge these fees has led a lot of experts 0:06:42.760 --> 0:06:45.920 to to say that if they can't charge these high 0:06:45.960 --> 0:06:49.600 interest rates, they're going to pull back on allowing some 0:06:49.640 --> 0:06:53.280 of the riskiest borrowers to have credit access. A lot 0:06:53.279 --> 0:06:55.640 of people don't don't realize that that, you know, the 0:06:55.680 --> 0:06:59.000 cap wouldn't just mean, you know, suddenly they aren't being 0:06:59.080 --> 0:07:02.120 charged as much on their card balances. It would mean 0:07:02.200 --> 0:07:05.400 that people wouldn't be able to get credit cards and 0:07:05.440 --> 0:07:08.159 wouldn't be able to borrow money in the way that 0:07:08.200 --> 0:07:10.720 they are right now. You know, barroers with lower credit 0:07:10.720 --> 0:07:14.400 scores might not be able to get credit cards if 0:07:14.440 --> 0:07:18.200 the interest rate was capped, and that could, you know, 0:07:18.280 --> 0:07:22.760 theoretically push them into much riskier credit. 0:07:22.480 --> 0:07:26.720 Products, products like payday loans, which can have even higher 0:07:26.760 --> 0:07:31.320 interest rates than credit cards coming up. Capping credit card 0:07:31.440 --> 0:07:35.040 interest rates is an idea that's historically had bipartisan support 0:07:35.360 --> 0:07:37.680 for the relief it could bring borrowers who fall behind 0:07:37.720 --> 0:07:53.920 on payments. Could it go from proposal to policy. Trump's 0:07:53.920 --> 0:07:57.600 initial social media post about capping credit card interest rates 0:07:57.920 --> 0:08:01.680 set a January twentieth deadline forks to comply, but that 0:08:01.800 --> 0:08:06.320 deadline has come and gone. Bloomberg's Claire Balentine says there's 0:08:06.400 --> 0:08:09.800 essentially two ways this could move forward. Trump signs an 0:08:09.840 --> 0:08:14.600 executive order where Congress passes a law. An executive order 0:08:14.680 --> 0:08:18.160 might be subject to legal challenges, but Congress has been 0:08:18.200 --> 0:08:19.760 interested in this idea before. 0:08:20.360 --> 0:08:23.520 I think that's something that perhaps you know Trump and 0:08:23.560 --> 0:08:26.960 other lawmakers are kind of banking on, is that there 0:08:27.080 --> 0:08:31.240 has been support for this from both sides of the aisle. 0:08:31.840 --> 0:08:37.119 In twenty nineteen, Senator Bernie Sanders and Representative Alexandria Ocasio Cortes, 0:08:37.480 --> 0:08:42.200 both Democrats, proposed a fifteen percent cap, and just last year, 0:08:42.480 --> 0:08:46.000 Sanders and Republican Senator Josh Holly teamed up on a 0:08:46.000 --> 0:08:48.720 bipartisan bill proposing a ten percent limit. 0:08:48.880 --> 0:08:51.680 Talk is cheap, but if he's really ready to put 0:08:51.760 --> 0:08:53.920 up and get something done, then let's do it. 0:08:54.640 --> 0:08:58.720 On CNBC last week Democratic Senator Elizabeth Warren said she'd 0:08:58.720 --> 0:09:02.880 work with Trump if he's furious about addressing affordability, including 0:09:03.040 --> 0:09:05.120 making credit card caps a reality. 0:09:05.800 --> 0:09:10.199 There have been really broad bipartisan support over the years. 0:09:10.800 --> 0:09:14.000 You know, that's very different though than actually passing something. 0:09:14.400 --> 0:09:17.760 Why haven't we seen a credit card interest rate cap before? 0:09:18.040 --> 0:09:21.560 One lawmakers can't really agree on, you know, the exact 0:09:21.559 --> 0:09:24.559 specifics of it. And two, you know, there's really powerful 0:09:25.400 --> 0:09:28.960 lobbying from from banks and from the financial services industry 0:09:29.000 --> 0:09:32.280 that is saying that we need to have these high 0:09:32.320 --> 0:09:34.720 interest rates and then if not, you know, then that 0:09:34.760 --> 0:09:38.680 could have negative effects for consumers. So it's it's almost, 0:09:38.880 --> 0:09:41.320 you know, a messaging question. And you know, the big 0:09:41.320 --> 0:09:43.679 banks in the US are really powerful. You know, they 0:09:43.679 --> 0:09:45.480 make a ton of money, they employ a lot of people, 0:09:46.120 --> 0:09:51.040 and so there's there's really strong pushback from the financial industry. 0:09:51.240 --> 0:09:54.720 But Claire says some banks may be considering responding to 0:09:54.760 --> 0:09:59.720 Trump's idea with their own counter offers. Built, a firm 0:09:59.760 --> 0:10:03.240 known for offering rewards on rent and mortgage payments, is 0:10:03.320 --> 0:10:06.360 unveiling three new cards that will have rates capped at 0:10:06.400 --> 0:10:10.120 ten percent for a year. Bloomberg has also reported that 0:10:10.200 --> 0:10:13.520 bank of America and City Group, according to people familiar 0:10:13.520 --> 0:10:15.880 with the matter who asked not to be identified citing 0:10:15.920 --> 0:10:20.080 private information, are both separately considering offering cards with a 0:10:20.120 --> 0:10:23.200 ten percent rate. Representatives for a Bank of America and 0:10:23.240 --> 0:10:27.280 City Group declined to comment. But a selection of cards 0:10:27.320 --> 0:10:31.119 with lower rates isn't the same as a universal cap. 0:10:31.160 --> 0:10:34.240 And I think, you know, right now, they started out 0:10:34.240 --> 0:10:37.200 with Trump coming out with this broad proposal that would 0:10:37.200 --> 0:10:39.320 be really bad for banks, and now banks are sort 0:10:39.360 --> 0:10:42.600 of trying to say, how could we appease the president. 0:10:43.200 --> 0:10:45.640 They're not offering those because they think they're going to 0:10:45.679 --> 0:10:47.880 make the exact same amount of money they are from 0:10:47.960 --> 0:10:50.720 their products that have higher interest rates. But I think 0:10:50.760 --> 0:10:54.360 they are trying to figure out how they can, you know, 0:10:54.400 --> 0:11:00.080 maybe appease Trump and get him back off of this 0:11:00.360 --> 0:11:01.320 broader thread. 0:11:03.280 --> 0:11:06.320 This is the big take from Bloomberg News. I'm Sarah Holder. 0:11:06.840 --> 0:11:09.720 The show is hosted by Me, David Gera, and Wanha. 0:11:10.360 --> 0:11:13.679 The show is made by Aaron Edwards, David Fox, Eleanor 0:11:13.720 --> 0:11:19.319 Harrison Dengate, Patti Hirsch, Rachel Lewis, Krisky, Naomi Julia Press, 0:11:19.480 --> 0:11:24.520 Tracy Samuelson, Naomi Shaven, Alex Ugia, Julia Weaver, Yang Yong, 0:11:24.880 --> 0:11:28.240 and Taka Yasuzawa. To get more from the Big Take 0:11:28.360 --> 0:11:32.120 and unlimited access to all of bloomberg dot com, subscribe 0:11:32.160 --> 0:11:36.240 today at Bloomberg dot Com Slash Podcast offer. Thanks for listening. 0:11:36.480 --> 0:11:43.920 We'll be back on Monday.