Trump's 10% credit card interest rate cap call draws mixed reactions from Ackman, Warren, US banking groups

United States President Donald Trump's call for a 10% credit card interest rate cap today, has drawn strong reactions from across the board, including from billionaire investor Bill Ackman, US Democratic Senator Elizabeth Warren, and industry body, the Consumer Bankers Association.

Notably, while Donald Trump called for capping credit card interest rates at 10% for a year, effective from January 20, in a social media post, and the same was also announced by The White House, no details have yet been released.

The date marks the anniversary of his second term as US president and comes months ahead of the US mid-term elections scheduled for November this year.

The US President said his administration will no longer let the American Public be “ripped off” by credit card companies and that this move is aimed at improving “affordability” for Americans.

It is a popular bi-partisan issue raised by US lawmakers over the years to no avail. Among those who made proposals include Democratic Senator Bernie Sanders, Republican Senator Josh Hawley, Democratic US Representative Alexandria Ocasio-Cortez, and Republican Congresswoman Anna Paulina Luna. Each has proposed a 10% cap, as per a Reuters report.

As per the Reuters report, immediately after Donald Trump's announcement, when reached out, no major American banks or credit card issuers had a response. This included banner names such as American Express, Bank of America, Capital One Financial Corp, Citigroup and JPMorgan.

Meanwhile, billionaire investor Bill Ackman tried to disuade the US President, calling the move a “mistake”. He wrote: “Without being able to charge rates adequate enough to cover losses and to earn an adequate return on equity, credit card lenders will cancel cards for millions of consumers who will have to turn to loan sharks for credit at rates higher than and on terms inferior to what they previously paid.”

He also offered possible alternative solutions: “In order to bring down credit card rates, we need more innovation and competition among credit card lenders. Regulatory changes that enable new entrants could lead to a reduction in rates,” he added.

Further, in a joint statement, the Consumer Bankers Association, Bank Policy Institute, American Bankers Association, Financial Services Forum and Independent Community Bankers of America stated that while they “share the President's goal of helping Americans access more affordable credit, if enacted, this cap would only drive consumers towards less regulated, more costly alternatives”, Reuters reported.

The report stated that results of the study were clear: Profit margins at every FICO tier (your creditworthiness score), is “thick enough to absorb a very significant reduction in interest caused by a new federal usury rate”.

There is however a caveat. To maintain profitability, banks would need to reduce rewards to those customers with FICO scores below 760, by as much as $27 billion.

Overall, it is still a gain. The report noted, “On net, consumers would collectively save $73 billion. And in every tier, the money saved by customers in the form of lower interest would far exceed the value of any rewards lost (by at least three times). Customers with FICO scores above 760 would not see a reduction in their rewards but they would receive some of the savings — about $16 billion worth.”

Inversely to Ackman's proposal, the study concluded that while more competition could be helpful, it cannot resolve the fundamental problems. “More competition is likely to affect salient terms like annual fees and rewards, but unlikely to reach interest rates. For that reason, it is time for Congress to standardize interest rates by mandating a reasonable rate,” it suggested.