Senator Bernie Sanders, currently running to become the Democratic nominee for President, and Representative Alexandria Ocasio-Cortez, have proposed to reform the way credit cards work in the United States.
Calling banks “modern-day loan sharks” they are calling for a 15% limit on credit card interest rates and they also want the US Postal Service to enter the banking business, to offer “loans and checking and savings accounts.”
Access to Banking is a Real Problem for Low Income Americans
Free checking accounts aren’t as ubiquitous as they once were – for very good reasons – but they still exist. NerdWallet has a list of several but it’s far from exhaustive.
Banks have added fees, or required minimum balances or direct deposit or other transactions, because it’s no longer profitable to just offer free checking. That’s because of the Durbin Amendment to Dodd Frank financial reform legislation, which effectively outlawed banks earning a profit off of their debit cards. This is also why you no longer earn debit card rewards, banks aren’t making money on the transactions so aren’t competing for your debit business.
Financial institutions used to want checking account business because it would get them consumers’ debit card transactions. Once they no longer made money off debit charges, the subsidy for free checking was gone.
The broader point though is that banks want wealthy customers with lots of different service needs because there are more opportunities for them to profit. Giving a free checking account to someone without much money means it’s hard to cover costs, and so banks turn to fees.
Encouraging the Postal Service to enter banking seems both foolhardy and unnecessary. Sure they already own real estate (‘branches’) but they’re neither known for service nor financial savvy. Assuming federal deposit guarantees are extended to postal banking the policy would create huge liability. It would be simpler and cheaper to simply repeal the law that reduced access to free checking in the first place.
Senator Sanders and AOC Promise the End of Rich Credit Card Rewards
Banks make money off of fees charged to consumers (such as a card’s annual fee), merchant swipe fees (the percentage they and the payment network take from each transaction), and interest charged to consumers.
Cards like Chase Sapphire Reserve are rich enough that they appear to be giving the entire interchange amount back to the consumer in rewards and benefits. The only way it makes sense to offer is on the bet that they’ll attract business lending money, not just processing payments. Without that products like this, and expensive co-brand deals generally, aren’t sustainable.
To be clear, credit card rewards wouldn’t disappear entirely. Capping APR at 15% would support products more like what credit unions offer today — at least until Senator Sanders and AOC cap interchange rates, too, which will do to credit card rewards what that same policy did to rewards for debit card spending.
As a matter of public policy that might seem desirable if it meant helping the least well-off pay less for access to credit. But it’s going to have the exact opposite effect.
Capping Credit Card Interest Rates Means Consumers Will Pay Higher Interest Rates — Not Lower Rates
If you limit what banks can charge for credit, you’re also limiting whom they’ll lend to. Senator Sanders and AOC observe that the average APR today is over 17%. They want the maximum to be lower than today’s average. That may support lending to customers with the lowest default risk, although even there these are still unsecured loans. It won’t support lending to customers who aren’t as well off, or with a history of late and missed payments or defaults.
This policy does nothing to remove the need that people have to borrow. Instead it forces them to use their next-best lending alternative after credit cards, once credit card lending is no longer available to them.
People choose credit cards because they’re a better option than the next choice they could make, whether it’s payday lending or a loan shark. And since the Sanders-AOC policy as-proposed would apply to payday lenders too… The Onion actually put it best 18 years ago.
Not so long ago, the loan shark flourished, offering short-term, high-interest loans to desperate people with nowhere else to turn. Today, however, Pistone and countless others like him are being squeezed out by the major credit-card companies, which can offer money to the down-and-out at lower rates of interest and without the threat of bodily harm.
It’s Hard to Imagine a Policy More Designed to Hurt the Poor
If poor (and poor credit) customers can’t get credit cards, they won’t be able to move out of high cost lending ro build their credit.
Credit card companies, looking to make up lost revenue, will raise annual fees. That’s what happened in Australia when interchange rates were capped. That will make credit cards too expensive for many poor customers to afford.
And by the way it’s not the rich who will be harmed from the elimination of credit card rewards, it’s the middle class whose rewards make a difference for quality of life – whether cash back or trips that would otherwise only be the province of the wealthy.
Imagine you wanted to develop a policy that would erect the greatest barriers possible between the poor and middle classes and the already wealthy, and prevent income mobility, what would that policy look like? It would probably include limiting access to credit along the lines proposed here.
NB,
Pushing people more toward online banking is no panacea when it comes to the problems faced by the non-banked/unbanked/underbanked in trying to get by financially in very basic ways.
Sweden, for example, has become super hostile to cash and its banks led the charge to internet banking, and yet free banking is harder than ever to find for those who are most at the margins of society.
Lots of Swedish banks won’t even accept cash from account holders or applicants for accounts and often try to do so only if it comes with a fee for cash deposit. The result is that the marginalized who are most reliant upon cash for transactions and storage of “wealth” tend to be more at risk than they would otherwise be from the banks’ moves toward online banking and away from cash.
@Gary: Good analysis! However, you are too kind in not saying that neither Alexandria Ocasio-Maduro nor Bernie Maduro have presented any evidence that the unsecured credit market is not operating efficiently.
i read six or eight travel blogs regularly. this is the ONLY one in which the politics of the blogger in chief are made readily apparent. i usually don’t know which side of the aisle those other guys are on… but, gary, you consistently inject conservative right wing sentiment into the most innocuous of posts. you know those disclaimers you run about how the site may make a commission from affiliate programs? you should consider running one that says “staunch conservative traveler here; left wing commie pinko liberal travelers not welcome.” that’s the message you’re sending… it grows tiring after awhile, regardless of which side of the divide you’re on.
When I want unsolicited political advice I’ll go to Facebook or Twitter.meanwhile I look to you for airline information. Can you give your credentials as a financial analyst? Or can you share where you got your degrees in finance or economics? Or is it that you just get way more money from financial institutions than we imagined ?
@Susan foertsch – my degree is in economics, my day job is as cfo at an economics research center, is there something here you think I’m mistaken about?
This proposal is exactly why everyone should think twice about electing liberal candidates to government office all all levels that want the government to run our lives, implement healthcare rationing, and expand the federal government that has become a complete wasteful leviathan. Choose Liberty so we can keep our point earning credit cards rather than Bernie and AOC deciding what is best for you and me.
@FrankieBoy Pangborn – funny many readers complain I’m too liberal and too critical of this administration’s policies!
When I was in Sydney I was hit with a 2.5% fee at the hotels for using my credit card. NO one told me this when I booked the hotel. SURCHARGE !!!! Car rentals same thing. What did they expect me to run to the ATM pull out $1500 cash ? not going to happen.
When we were in Iceland the Credit Card is the king. Try and pump petro at a 2am when the pump is open but no one is there, they do not take cash.
@ Gary,
You are dead on. How these two morons ever got elected is beyond me. Maybe their supporters should try living in a socialist paradise like Venezuela.
I couldn’t agree more with Gary here. We leave June 8 for 30 days in SE Asia and roughly 55 percent of the costs are covered by points, miles and co-branded card status. As a middle class guy, now retired, I would not have been to travel anywhere near the extent and in the comfort I have the past five years without credit card travel benefits.
I don’t “travel hack,” I practice “points and miles management.” The cards I hold are financial tools that I highly value and that I hope remain resources for me to use wisely and intelligently. I’d hate to think I’m denied those benefits because some people can’t handle them wisely.
A reduction of interchange fees by 1 percentage point would save consumers $15 billion, with a b. Yet “saving consumers $15 billions per year is a bad thing”, says the blogger who makes money because consumers are being bilked (“Many (but not all) of the credit card offers on the site are from banks from which we receive compensation if you are approved”)
Poster-book definition of lobbying (aka “deep-state”).
I guess we are supposed to learn to embrace them both?? ,they look to usher in the destruction of America as we know it from within
@Bill Dwyer: “We leave June 8 for 30 days in SE Asia and roughly 55 percent of the costs are covered by points, miles and co-branded card status”
I’ve been living in SE Asia for the past 4 months. Try stepping away from the western hotels and you will find better deals for cash at homestays and guest houses for tens of dollars a day.
Example: next week in Hua Hin, Hilton is ‘free’ on points for a small room…luxury homestay condo with pool on beach is $40 US/night.
Save those points for expensive places!!! 🙂
@Jake: You may have stumbled uninformed into the wrong conversation. The stupid idea from Alexandria Ocasio-Maduro and Bernie Maduro does not save a single cent in interchange fees. It simply tells people who know the credit business how to conduct their business according to the diktats of two know-nothings running for political office on a discredited political platform. Little wonder they garner the most support from the most ignorant and naive voters (first timers, overwhelmingly white, little or no job market experience as they have been cosseted in college — paid for by Daddy).
@Susan foertsch: Where do you get your economics? The DNC? God help you.
I think that it’s worth pointing out how unfair this is to Bernie Sanders and AOC. They introduce a bill against usury, something that has been illegal since Biblical times. The Chicken Little response is to say that this will end frequent flyer benefits, with no rational connection between the two things at all. The neck-bone-connected-to-the-toe-bone argument is the utter speculation that Sanders and AOC will go after interchange fees next, even though Sanders has been in Congress for 28 YEARS, and you haven’t pointed to any indication that he cares about interchange fees at all. Then we get into the bizarre argument that lowering interest rates on the poor inevitably will hurt the poor, as if there were some natural law that second-order effects always outweigh first-order effects. (Hint: they don’t.) This then opens the floodgates to socialism-Chavez-traitors-Marxists-blah-blah-blah.
If you want to use this blog to make political arguments, that’s fine, and if you are a sincere libertarian, that’s fine, too. I can respect that. But the notion that passage of the Sanders-AOC bill would mean the end of all those glorious free flights is fear-mongering no different from the Mexicans-are-coming-to-steal-all-your-stuff nonsense that passes for political discourse in some quarters.
I’ll agree with both of the socialists’ plan to cap all credit card interest rates at 15%, just after both of them also agree to cap all combined taxes (state, local, federal, medicare, social security, etc.) also at 15%.
What’s good for the goose, should be good enough for the gander.
@FergusOBum: “Then we get into the bizarre argument that lowering interest rates on the poor inevitably will hurt the poor”. Nobody said that! They have said that raising rates will hurt the poor and that is what Bernie Maduro and Alexandria Ocasio-Maduro will do. They are total economic ignorami. They think that abolishing the lowest-cost capital market for the poor will lower the rates they pay. Obviously it won’t, it will force them into higher cost markets.
Ferdinand Magellan said “Sanders has been in Congress for 28 YEARS”. Another politician leach, mooching off the taxpayers, while sanctimoniously lecturing them about values. At least as a bartender, AOC had an honest job.
@ Ferdinand Magellan
Do you really want a bar tender with a credit score in the low 400s and a single digit IQ and a man who has literally failed at everything he’s ever tried except slimy politician telling you about finances? I bet you thought Obama was going to fix the economy didn’t you?
@ Jim
This is a good example of ADD commentary. When discussing the merits and drawbacks of limiting interest payments on credit cards to 15%, and the complete disconnect between that and losing frequent flyer benefits, no — I don’t think that it matters that AOC worked as a bartender, nor what her credit score might or might not be, nor whether her IQ is in double digits or triple digits (not single digits, I’m quite sure), nor whether Bernie Sanders was a good teacher, carpenter, filmmaker and writer before he was elected Mayor of Burlington, nor whether I thought that Obama would fix the economy. Do you want to know why? For the same reason why I don’t book an award flight from New York to Paris through Brisbane. 2+2=4, not 2+2=grapefruit.
@ Ferdinand Magellan
QUOTE: I don’t think
You are 100% correct – you don’t think. Please keep telling us how financial genius aoc is going to save us all.
Given the change in bankruptcy laws about ten years ago, many unsecured loans are more secure than we think.
Also, legal fees and penalty rates are higher if bankruptcy or even late payments occur.
Credit card or revolving loans didnt create the banking crash of 2008, it was overvalued home loans charging very high interest rates on very high principal balances. Eventually a credit squeeze was triggered which caused banks to stop loaning money and call existing loans, affecting business hiring ability, until the Federal Reserve Board drastically lowered interest rates.
Some would argue that unemployment triggered stock market selling and home sales at low and very low prices, to make ends meet, and that triggered the avalanche.
Either way, banks seem to be in the drivers seat, with willy-nilly access to federal funds rate money at 2 to 4% cost, so even if they are limited to 15% or 18%, the money is earning multiples of the cost.
Talk of this is like mentioning the word kryptonite to superman.
Leef33 : “Either way, banks seem to be in the drivers seat, with willy-nilly access to federal funds rate money at 2 to 4% cost, so even if they are limited to 15% or 18%, the money is earning multiples of the cost.” The main cost in a credit card (an open line of credit to an individual), is that the consumer will not pay back, not the bank’s cost of funds. This is not complicated. Like Duh.
Other Just Saying: The delinquency rate on credit cards is under 3%. No way that you could justify anything close to those rates on that basis.
If anyone cares for some actual data on this subject, American Express nets around $8 billion a year, Citi around $15 billion, and Chase more than $30 billion. It seems entirely plausible to me that if credit card interest rates were capped, Amex, Citi and Chase would simply eat the difference — just as they did before their lobbyists wiped out state usury laws. If they could charge higher annual fees, offer lower benefits, charge higher interchange fees, etc., I’m sure that they would be doing that already. So if anyone was losing sleep over the thought that helping the poor might actually hurt the poor, you can relax now.
I also used to be a bank analyst years ago. Credit cards seem like easy money to a lot of people, but I have seen some real doozys. For example, did anyone here used to have an Advanta credit card. I did and never missed a payment.
From Wikipedia on Advanta: “In the early 1990s, when its assets were at an all-time high of $25 billion, the firm had the sixth-largest consumer credit card business in the United States, with seven million credit card holders.” “In mid-July 2009 the company announced it would lay off half its remaining workforce, going from approximately 400 employees to fewer than 200…On July 20, 2009, the company revealed that the default rate on its credit cards had reached a previously unheard-of 56.95%.” “On November 8, 2009, Advanta filed for Chapter 11 bankruptcy.” “The FDIC estimates the cost of the failure to its Deposit Insurance Fund to be approximately $635.6 million.”
Ajay,John and JIm good comments!!