President Trump’s proposed plan to cap credit card rates at 10% have sent big waves through the financial scene, causing shares of banks and credit card companies to take a fairly sizeable hit. Undoubtedly, the initial reaction felt a tad overdone and even a bit fear-driven, especially since a cap isn’t yet a guarantee. Perhaps bank and credit card shareholders are fearing the worst because few had such a risk on their radar going into the new year. In any case, the big banks have not wasted time voicing their concerns about such a move and the potential impact.
On paper, putting a 10% cap on credit card interest sounds like an incredibly good idea that could give some of the more indebted consumers a break, at least for some period of time.
Undoubtedly, it’s tough to climb out of a debt spiral, especially if you’re deep in credit card debt, which tends to boast some of the highest interest rates out there. Though 10% seems to be a fairer level that might be a huge win for certain consumers, the potential net effect might not be all too positive, especially when one considers how the banks could react in response to such a potentially disruptive and sudden move.
The disruptive impact might actually hurt the economy, say industry pundits
JPMorgan (NYSE:JPM | JPM Price Prediction) noted that such a credit card cap would wind up working against consumers as well as the economy. They might have a pretty strong case for why such caps shouldn’t go through.
Undoubtedly, tackling affordability through credit card interest caps may entail unwanted side effects. According to big bank CEOs, the big risk is that lenders might stop lending to those who aren’t deemed to be “low risk.”
If the rewards aren’t satisfactory for the risks taken on, perhaps many Americans might wind up with less credit at the end of the day. And while credit card interest caps come from a good place, it feels like the consequences may very well outweigh the benefits.
Additionally, the credit card issuers may need to find other ways to offset the lost earnings that would have come from interest rates far north of the 20% mark. From lowering the bar on credit card rewards to raising fees further, there are many ways for affected banks to pivot in light of a shocker that may have long-lasting implications for the industry.
With a broad basket of financial stocks plunging over fears that a cap could hit sooner rather than later, investors might wish to give the affected names a second look, especially since there’s still a good chance that the caps might not come into effect.
Of course, it’s difficult to play an event that could cause such a severe hit to earnings. In any case, with the big banks resisting such a move, it’s unclear how long a cap would stay in place once it’s discovered how hard the earnings impact is on the big credit card issuers.
American Express stock takes a big hit. It might be an opportunity to buy
American Express (NYSE:AXP) is a well-known Warren Buffett stock that’s now down just shy of 7% since the credit card cap news. It’s been a painful decline that may very well be just getting started, especially if the caps come into effect and the firm is forced to change its business model to cope with the effect on the bottom line.
As a firm with very generous rewards, American Express might have room to trim away on the perks of some of its lower-margin cards. Additionally, since the premier player in the credit card scene has had little issue with raising monthly fees, I do view the firm as better able to pass on more of the cost to consumers. Arguably, I think American Express is likelier to increase fees in response than to cut perks.
Either way, the firm might actually be able to gain at the expense of the banks, especially those that have tried so hard to offer more upscale perks for a higher price of admission, effectively taking a page out of American Express’s playbook. Could such a disruptive event for the credit card issuers actually help American Express gain market share?
It’s tough to say. Either way, perhaps investors are worried about an event that might be scrapped at some point down the line. If that’s the case, it might not be long before shares return to where they were before Trump’s credit card plan caused a rush to the exits.
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