Thumb through the credit card offers filling your mailbox, and you might notice a theme: Many have a Delaware return address. That’s no coincidence.
Delaware is home to the credit card businesses of Chase, Discover and Barclaycard U.S., according to the Federal Deposit Insurance Corp. Bank of America and Citi also maintain certain card operations there. Together, those issuers represent about half of the U.S. credit card market. Meanwhile, Delaware residents account for only 0.3% of the U.S. population.
What’s behind the credit card industry’s love affair with Delaware?
It all started with a court decision almost 40 years ago.
First, a court decision
In 1978, the U.S. Supreme Court unanimously decided in Marquette National Bank v. First of Omaha Corp. that credit card companies could export interest rates from where they were located to other states.
The case came about when First National Bank of Omaha mailed credit card offers to residents in Minnesota. A Minnesota bank, Marquette National Bank of Minneapolis, sued the Nebraska bank for violating the state’s usury laws.
“There were no interstate banks in those days,” former Delaware Secretary of State Glenn Kenton tells NerdWallet. “In those days, [if a bank] was incorporated in California, it paid taxes in California. It did business in California.”
Before the Marquette decision, banks trying to send credit card offers to out-of-state consumers ran into two problems:
- State usury laws: These limited how much issuers could charge in credit card interest
- Interstate banking restrictions: Federal law generally prohibited a bank from operating branches outside of its home state, unless it got permission from the new state where it wanted to do business
The Marquette decision, which allowed issuers to export interest rates from the states where they were located, didn’t kill the interstate banking prohibition; it just left it to wither and die.
“It allows states to do anti-consumer things,” says Ed Mierzwinski, the consumer program director at U.S. Public Interest Research Group, a consumer advocacy group. When South Dakota passed legislation to lift usury ceilings shortly after the Marquette decision, for example, it enabled banks in South Dakota to charge customers in California credit card interest rates exceeding what banks based in California could legally charge. “The bad South Dakota laws can pre-empt the good California laws” that limit interest rates, he notes.
In time, it left state usury laws essentially toothless.
Banks flee New York
For banks, the Marquette decision came at the perfect moment.
In the late 1970s and early ‘80s, the Fed raised rates to slow rampant inflation and encourage saving, making it more expensive for banks to borrow money. Credit card companies, many of which were based in New York, faced enormous losses. They were paying an annualized interest rate of about 19% to borrow money from the Fed, but New York’s usury law allowed them to charge cardholders no more than 12%.
That imbalance led Citicorp to move its credit card business from New York to South Dakota, which was in the process of passing legislation to lift its usury ceiling at the time. Citicorp brokered a deal with South Dakota leaders, promising jobs in exchange for permission to operate in the state, and hightailed it out of New York.
Meanwhile, Delaware Gov. Pierre S. “Pete” du Pont IV was looking for ways to bring more jobs to his state. That’s when Chase Manhattan Chief Operating Officer and President (and later, CEO) Thomas Lebrecque and his legal counsel Robert Douglass got in touch.
“It was them going to us, not us going to them,” says Kenton, who was Delaware’s secretary of state at that time. Delaware was much closer to New York compared with South Dakota. At the time, several major banks were already incorporated there because of the state’s Chancery Court, where corporate cases are heard by judges, not juries, and resolved faster. The Chancery Court has long made the state an appealing place for businesses to incorporate for legal benefits. In fact, two-thirds of all publicly traded companies today are incorporated in Delaware, according to the state’s website.
“They said, ‘We do not want go to South Dakota for two reasons: A) Citibank is already there and B) It’s South Dakota,’” Kenton says. Chase Manhattan asked whether Delaware would give it the same deal as South Dakota gave Citicorp. “The governor and I got together and said ‘Yes.’”
The Financial Center Development Act is born
In the fall of 1980, du Pont’s six-person bipartisan task force — on which Kenton played a key role — went to work on legislation that would become the Financial Center Development Act.
To incentivize big banks to move to Delaware, the law dangled these goodies:
- Invitations: It gave out-of-state banks permission to enter Delaware, provided that they met certain conditions — for example, employing at least 100 people in the state
- Interest rate flexibility: It largely eliminated usury ceilings
- Option to charge fees: It allowed banks to impose several types of fees on revolving and closed-ended credit, if they were disclosed
- Tax breaks: It implemented an inverted tax rate for banks making more than $20 million, taxing big banks at a lower rate than smaller banks
The law passed with bipartisan support, and lawmakers continued to amend it to attract more banks, Kenton says.
Several major banks soon moved operations to Delaware, including Chase Manhattan, J.P. Morgan & Co., Manufacturers Hanover and Chemical New York. Even Citicorp — which had just relocated its card business to South Dakota — opened an operation in Delaware.
By 1983, the Federal Reserve of Philadelphia noted that 11 major bank holding companies, including many with credit card businesses, had opened subsidiaries in Delaware.
Even after federal laws restricting interstate banking were repealed in 1994, Delaware remained a credit card industry stronghold because of its low tax rate for banks and Chancery Court.
Credit cards today
Kenton acknowledges that the credit card industry hasn’t always been consumer-friendly. “Have there been abuses? Yes,” he says. “Congress has corrected a lot of abuses.” But there have also been benefits. If not for the credit card revolution in Delaware, he says, there wouldn’t be affinity cards, travel cards and airline cards.
Just as Delaware changed the credit card industry, the credit card industry changed Delaware.
In 1980, Delaware state officials hoped the FCDA would add 1,000 jobs, Kenton said. As of February 2017, the state’s financial industry employs more than 47,000 people, according to the Bureau of Labor Statistics.
“The governor was very forward-looking,” Kenton says. “He said it would be a big boost to the economy, and it sure was.”
This article was written by NerdWallet and was originally published by Forbes.