Donald Trump and Sebastian Siemiatkowski, CEO of Klarna, have something in common: they both know populism is one way to the top. Populism is a thin ideology. On its own, it means little. Canadian philosopher Joseph Heath defined it as the rebellion of fast, intuitive thinkers against a slow and deliberative thinking society.
In a word, populism is common sense. Common sense, however, shows up in different ways. One of them is the president’s revived promise to cap credit card interest rate to 10 percent in the United States, which, according to Siemiatkowski, doesn’t go far enough. Far enough for Trump isn’t far enough for Siemiatkowski because their ambitions are different.
By capping credit card interest rates under the banner of affordability, Trump is trying to revive his sinking popularity and give Republicans a fighting chance against Democrats. His obsession isn’t with credit cards, per se. It’s with interest rates. He directed Fannie Mae and Freddie Mac to buy mortgage bonds and lower mortgage rates. Under his watch, the Justice Department is waging lawfare against the head of the Federal Reserve to lower the federal funds rate. The idea is plain: promise people the opiate of cheap money ahead of the midterms and mitigate any disasters once the high wears off.
On cue, as if the world has done this experiment before, America’s biggest banks warned that capping credit card fees would restrict the supply of credit cards. Not just for consumers, who need to pay emergency bills from time to time, but for businesses, too. Credit cards are cash-flow for entrepreneurs when payments are late or sales are slow. That’s why researchers have found that economic and employment growth shrinks when banks cut the supply of credit cards.
Still, credit card interest rates are a self-evident problem for fast, intuitive thinkers. It’s common sense that high interest rates are unfair. You can feel the unfairness in your bones if you neglect to think about what goes into setting something as deceptively simple as an interest rate.
It’s tempting to dissect interest rates with simple accounting. First, add up the revenues of a credit card business, which come from fees and interest payments. Second, add up the costs of issuing a credit card: expected defaults, marketing expenses, loyalty programs, and the opportunity cost of capital. Then subtract the costs from the revenues. Why not cap rates to reduce this arithmetical difference to something more reasonable?
Simple accounting like this misses a particular risk banks manage when setting credit card interest rates: systemic risk. In bad economic times, the probabilities of borrowers defaulting is correlated. Borrowers with low credit scores are at a greater risk of defaulting, but so are borrowers with high credit scores. It’s also more likely that borrowers will default on multiple loans, not just their credit cards. To make matters worse, these are precisely the times when banks struggle to raise more capital and absorb losses. So while credit card interest rates appear usurious when the economy is doing fine, they may just be reflective of long-run exposure to systemic risk.
That doesn’t mean credit cards are good for everyone, which Klarna’s CEO is intent on repeating. Some consumers mismanage their money, falling into a vicious cycle of debt. Rewards programs are like a subsidy collected from poor people and redistributed to the rich. That may be why Siemiatkowski called the credit card industry an “extraction machine.” Or he may be playing a populist game, like the U.S. president, in service of his own selfish and myopic ambitions.
Klarna is a fintech company that makes money from buy-now-pay-later, and so Siemiatkowski stands to benefit when competitors are legally disadvantaged. If access to credit cards is restricted, priced-out consumers can turn to BNPL instead. Regulatory arbitrage has been great for fintech companies. American fintech was born of it, following an amendment to Dodd-Frank in 2010 that let small banks earn more debit interchange revenue than big ones.
It’s hard to believe Siemiatkowski cares about mismanagers of money and poor people as much as Klarna’s fortune. By his logic, American BNPL users are subbing one “extraction machine” for another. Some researchers have found that BNPL mostly causes Americans to shop online more, leading to overdraft and NSF fees or drawing on savings when it’s time to pay back the loan.
There is nothing immoral about lending, whether by way of credit card or BNPL. Among borrowers, there will always be winners and losers. Some of the losers need saving, but meddling with interest rates won’t do it. If anything, it will make things worse by eliminating the best of only terrible choices for people at the margins.
But there is something immoral about weaponizing the law for personal gain. Elites like Trump advisors and Siemiatkowski appropriate populist language, but their sense is far from common. The political and business class does slow down and think. They read books and papers about our cognitive biases and the stealthy ways our behaviour can be manipulated. Instead of using that knowledge to make us instruments in their petty games, they should re-orient themselves as instruments in ours.