Buzz
If you take a closer look at the fine print on your credit card statements—and given the sometimes outrageous terms, it’s a good idea to do so—you'll discover that many credit card issuers have established their operations in Delaware. This tiny state, the second smallest in the nation, is famous for its bike-friendly spaces, its state insect (the ladybug), and, for a brief period, the world's tallest LEGO tower. But what makes Delaware such a prime location for credit card giants like Discover, Chase, and Bank of America?
As noted by Forbes, it all stems from a 1978 court ruling. When the First National Bank of Omaha in Nebraska began sending credit card offers to residents of Minnesota, Marquette National Bank of Minneapolis objected and filed a lawsuit. One issue was that First National appeared to be violating usury laws by charging 18% interest—6% over Minnesota’s legal limit. Moreover, interstate banking wasn’t common at the time. While First National’s interest rates were higher, they attracted customers by offering no annual fee, which could undermine Marquette's business. While consumers might end up paying more in interest, the lack of an upfront annual fee made First National’s offer appealing.
When the U.S. Supreme Court reviewed the case, they ruled in favor of First National, allowing banks in states with higher interest rates to market to consumers in states where interest rates were legally lower.
Why would consumers choose this? Typically, when lenders view consumers as higher risk, they impose higher interest rates or refuse to lend at all. However, larger banks were now able to engage with these customers, sometimes preventing them from being overcharged by smaller lenders.
“Once Marquette entered the scene, you could raise the rates a little more to cover the higher-risk customers,” said Duncan McDonald, former general counsel for Citibank’s credit card division, to Frontline. “As a result, millions of people who had been paying 30-35% interest rates to small lenders suddenly had access to credit at 19% interest with a $20 annual fee. In that sense, it was a very equitable and beneficial move.”
How does this connect to Delaware? During the tenure of Governor Pierre “Pete” du Pont, Delaware was keen on attracting corporations to set up shop and boost the local job market. Chase approached Delaware to see if they could offer the same favorable conditions as South Dakota, which was lifting its usury limits to encourage business. (Citibank was the first to take advantage of this.)
Keep in mind that Delaware is a small state, and the nation was still recovering from an economic downturn. Eager to bring in business, Delaware agreed. In 1980, the state passed the Financial Center Development Act, which offered numerous corporate perks, such as relaxed interest rate limits and flexible fee structures. This made Delaware an attractive home for credit card companies, as they could charge nearly any rate regardless of the customer’s location.
As a result, credit became more widely accessible. Before the Marquette decision in 1977, only 38% of U.S. households had a credit card. By 1989, that number had risen to 56%. Today, it’s closer to 80%.
Delaware’s appeal to credit card companies and other businesses goes beyond its inflated interest rates. The state also offers tax laws that reduce tax liabilities and permits companies to incorporate with minimal risk. Perhaps most notably, it is home to the chancery court, which speeds up business legal cases through judges rather than juries. All of this contributes to why America’s second smallest state holds such significant influence in the business world.
