The reason so many credit card companies are based in Delaware
If you read the fine print on your credit card statements — and given their sometimes outlandish terms, you really should — you’ll notice that a number of issuers have set up shop in the state of Delaware. The second-smallest state in the country boasts bike-friendly terrain, an official state bug (the Ladybug), and, briefly, the tallest LEGO tower in the world. But what makes it such a catch-all place for Discover, Chase, Bank of America and other major credit card companies to do business?
According Forbes, it boils down to a 1978 court case. When First National Bank of Omaha in Nebraska sent credit card offers to Minnesota residents, Marquette National Bank of Minneapolis cried foul and sued. On the one hand, First National appeared to violate usury laws that capped interest rates. (They were charging 18%, or 6% more than Minnesota’s cap.) On the other hand, banks generally didn’t do interstate business at the time. Although First National had a higher interest rate, it also boasted that it had no annual fees, which would reduce Marquette’s business: consumers might end up paying more interest, but the lack of fees initial annuals would be attractive.
When the US Supreme Court heard the case, it ruled in favor of First National. This meant that banks in states where interest rates were allowed to be high could sell to consumers in states where they were legally lower.
Why would consumers want this? When lenders assess consumers with a higher risk profile, they normally charge higher interest rates or refuse to lend money altogether. But now, the big banks could deal with these customers, sometimes allowing the borrower to avoid the price gouging practiced by the small lenders.
“As soon as Marquette came in, you could raise the price a little bit more to cover those people,” said Duncan McDonald, the former general counsel for Citibank’s credit card division. First line. “And as a result, tens of millions of people, who were paying 30 and 35 percent interest rates to small loan companies, all of a sudden got the product at 19 percent interest and a $20 annual fee, so in that sense it was very egalitarian and very good.
What does this have to do with Delaware? During the tenure of state governor Pierre “Pete” du Pont, the state sought to incentivize businesses to make the state their base of operations and expand the labor market. Chase went to Delaware and asked if they could offer the same favorable terms as South Dakota, which eliminated the usury cap in order to attract business. (Citibank was the first to accept the offer.)
Remember that Delaware is a small state and the country as a whole was trying to recover from an economic downturn. The state of Delaware, hungry for business, agreed. In 1980, the state introduced the Financial Center Development Act, which officially authorized a variety of business benefits, including interest rate flexibility and a fee schedule. Simply put, it was in a credit card company’s financial interest to be based in Delaware because they could charge pretty much whatever they wanted, no matter where the customer was.
As a result, credit has become more accessible. In 1977, before the Marquette decision, 38% of American households had at least one credit card. In 1989, it was 56%. Today it is closer to 80%.
But inflated interest rates aren’t the only reason Delaware is attractive to credit cards and other companies. The state also has laws that minimize tax bills and allow businesses to incorporate with minimal liability. Perhaps best of all, it houses the Chancery Court, which expedites business court cases with judges, not juries. All told, that’s why the second-smallest US state looms large in business.