It seems that the credit industry has come under a microscope in the past few months. As the Biden administration wraps up its term, it has heaped increased scrutiny on the space. Credit card Rewards programs, Buy-Now-Pay-Later (BNPL) offers, and interest are all in the government’s regulatory crosshairs in 2024 and beyond.
The scrutiny on credit cards seems like a bipartisan trend: Donald Trump promised to cap credit card interest rates at 10%, drawing unusual applause from progressive senator Bernie Sanders.
Let’s dive into potential changes on the horizon, and what it could mean for businesses and your wallet.
The Current State of Play
Joe Biden has used his last year in office to look into a number of credit industry practices. The most salient in 2024 were BNPL plans and credit card reward systems.
Rewards or Punishment?
The Consumer Financial Protection Bureau (CFPB) has been looking into credit card rewards programs, and not because the bureau’s agents are planning a trip to Tahiti. As legal firm Kilpatrick covered over the summer, the report found that:
“benefits offered by credit card rewards programs play a significant role in deciding which credit card they choose. However, in recent years, consumers have made a series of complaints… suggesting that they may engage in practices that are potentially harmful and deceptive”.
The practices that most concerned the CFPB were:
- Unexpected Conditions: Rewards programs may hide certain conditions in the fine print, making it harder to redeem rewards or misleading customers about the points they’ve accumulated.
- Rewards Inflation: credit card issuers can and often do change the terms of their rewards programs, for example by making a promotional offer require more points than it used to, effectively lowering the value of points already accrued.
- Redemption Problems: Some customers complain that credit card issuers make it too difficult to redeem rewards, especially for cash.
- Taking Back Points: Card issuers have also caught flack for revoking points already earned, usually either because they expired or the account was closed before redemption.
These all seem like reasonable things to scrutinize, but rewards are not the only item in the government’s regulatory crosshairs.
BNPL: (Kind of) a Credit Card
When it comes to consumer finance, one of the Biden Administration’s biggest moves in 2024 was to classify BNPL programs, such as PayPal’s “Pay-in-4” option, as credit cards in certain cases. That opens up BNPL platforms to some of the same regulations that credit card issuers are subject to. The Supreme Court backed up this interpretation over the summer, which could make it the precedent moving forward.
There is a lot of complicated legalese here, but there are a couple of meaningful impacts for the BNPL industry. Interpreting BNPL schemes as quasi-credit cards means that they are subject to some of the same consumer protection laws. This could put more responsibility on BNPL lenders not to “stack loans” on the same consumer, which means allowing them to take on several BNPL plans with the same or different lenders. BNPL providers may also require more stringent income verification requirements before extending credit.
None of those changes are going to kill a growing movement toward BNPL, but it could force companies like Paypal to be more careful about who they finance. Industry advocates say that more regulation could mean lower profits and more friction for customers.
New President, New Priorities
Credit Card Rates
The incoming Trump Administration may differ with Joe Biden on a lot of things, but it seems that they agree when it comes to bringing credit costs down. Donald Trump railed against high interest rates during the campaign, promising to lower both inflation and rates. That may put the former and future president on a collision course with the Federal Reserve, which sets the federal interest rate independent of the White House.
Donald Trump’s beef with high interest rates was reflected in a major policy proposal during the campaign: capping credit card interest rates at “around 10%”. Trump’s proposal drew rare applause from progressives, such as Bernie Sanders and Elizabeth Warren.
Higher Rates, Rising Prices Send Credit Card Debt Soaring
Source: YCharts
It’s an attractive idea, especially as Americans have struggled with growing credit card debt and interest payments since the pandemic. However, capping credit card rates may be easier said than done, and would have unintended consequences for consumers.
Today’s average credit card rate is a whopping 21%, roughly double Trump’s proposed cap. A cap of 10% could limit credit card access to only the safest borrowers, as credit card issuers weigh credit risk against interest revenue.
Lighter Touch on Regulation
As is generally the case, the Republican party favors a lighter touch when it comes to regulating the financial industry. While that seems to be shifting, for example with Trump’s proposed cap on interest rates and challenge to the Federal Reserve, the general rule should still hold true. Donald Trump has promised to reverse much of Joe Biden’s regulatory moves, and his team has even floated dismantling the CFPB altogether. The crypto payments space in particular could also benefit from a second Trump term, as evidenced by Bitcoin soaring above $100K in the weeks following the election.
Regardless of whether the Trump Administration follows through with a cap on credit card rates, it clearly opposes high interest rates and wants the government to play a part in bringing them down. In 2024, it looks like government intervention in the economy is more popular across the political spectrum than it’s been in decades. That means a potentially wobbly outlook for the payments industry, and the need to adapt to a changing regulatory environment.
COCARD: Navigating New Terrain
The first quarter of the 21st Century has been a wild ride. Since 1999, COCARD has thrived in all types of economic and regulatory environments, in one of the economy’s most dynamic industries.
Our secret is anticipating and adapting to changing landscapes. As a rule, we adopt new technology early, ensure that our POS solutions are always 100% compliant, and we keep our merchants informed of any rule changes on the horizon. Our mission: to empower our member-owners, and to give merchants and the people they serve the best payment suite available.
To find out more about how COCARD empowers the member-owners and merchants in our network, get in touch today!