President Donald Trump continues to try to shake things up as the second year of his current term gets underway. In January, he proposed a one-year cap on credit card interest of 10%. This is part of his push for better affordability for Americans.
The administration is clearly issuing a warning to certain businesses within the financial services sector. Investors in these two S&P 500 (^GSPC 1.52%) stocks shouldn't worry, though.
Image source: Getty Images.
Credit card interest is an easy target
Given that credit card interest rates on balances outstanding can often fall between 25% and 30%, and that Americans hold more than $1.2 trillion of this type of debt, it's an easy market for politicians to target. A proposed cap, unsurprisingly, would deal a blow to credit card issuers like JPMorgan Chase or Capital One, among many others, that generate significant revenue from consumers who carry revolving balances.
If passed, this proposal would likely force a reduction in credit to only the most creditworthy borrowers. And it would probably impact the points, perks, and rewards that are so popular.
This initiative would need to clear major legislative hurdles. And it's unlikely to garner enough bipartisan support. What's more, the banking industry has powerful lobbyists who aim to protect the interests of financial services companies. This also wasn't the first time a proposed cap was brought forward.
No concerns for these two dominant businesses
NYSE: V
Key Data Points
Unlike credit card issuers, Visa (V 0.81%) and Mastercard (MA 1.33%) do not approve borrowers and lend money. Consequently, there is no credit risk in their business models. A cap on interest rates would likely mean much lower spending with credit cards due to there being fewer customers that banks would approve. However, the chances of this proposal becoming law are slim to none.
These two companies earn fees anytime their billions of cards are swiped at checkout. And these cards are accepted at more than 150 million merchant locations. Therefore, there is a powerful network effect at play.
As the number of active cards increases, these payment platforms become more valuable to merchants. And with more places to shop, the utility for cardholders grows.
NYSE: MA
Key Data Points
This setup protects the competitive positions they have and the incredible profits they are able to generate. During the three-month period ended Dec. 31, Visa and Mastercard reported unbelievable net profit margins of 54% and 47%, respectively.
Regulatory issues might always pop up. But these two businesses have proven that they can keep thriving.
