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MF EXPLAINS IT ALL

The Reason So Many Credit Card Companies Are Based in Delaware

Jake Rossen
Probably mailed from Delaware.
Probably mailed from Delaware. / Ridofranz/iStock via Getty Images
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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 of bike-friendly land, an official state insect (the ladybug), and, briefly, the world’s tallest LEGO tower. But what makes it such a catch-all place for Discover, Chase, Bank of America, and other major credit card corporations to conduct business?

According to Forbes, it comes down to a 1978 court case. When the First National Bank of Omaha in Nebraska sent credit card offers to residents of Minnesota, the Marquette National Bank of Minneapolis cried foul and sued. For one, First National appeared to be violating usury laws that capped interest rates. (They were charging 18 percent, or 6 percent more than the Minnesota cap.) For another, banks typically didn’t do interstate business back then. While First National had a higher interest rate, they also boasted of no annual fee, which would cut into Marquette’s business: Consumers might wind up paying more in interest, but the lack of an up-front annual charge would be enticing.

When the United States Supreme Court took up the case, they ruled in favor of First National. That meant banks in states where interest rates were permitted to be high could market to consumers in states where they were legally lower.

Why would consumers want that? When lenders assess consumers with a higher risk profile, they normally apply higher interest rates or refuse to lend money altogether. But now larger banks could transact with those customers, sometimes allowing the borrower to avoid the price gouging practiced by smaller lenders.

“The minute Marquette came along, you could jack the price up a little bit more to cover those people,” Duncan McDonald, the former general counsel of Citibank’s credit card division, told Frontline. “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 rate and an annual fee of $20. So in that sense, it was very egalitarian and very good.”

What does this have to do with Delaware? During the term of state governor Pierre “Pete” du Pont, the state was looking to entice corporations to make the state their home base of operations and widen the job market. Chase went to Delaware and asked if they could offer the same favorable terms as South Dakota, which was eliminating the usury ceiling in order to draw business. (Citibank was the first to take them up on the offer.)

Remember that Delaware is a tiny state, and the country as a whole was trying to rebound from an economic recession. The state of Delaware, eager for the business, agreed. In 1980, the state introduced the Financial Center Development Act, which formally allowed for a variety of corporate perks, including interest rate flexibility and a fee schedule. Simply put, it was in a credit card company’s best financial interests to be based in Delaware since they could charge virtually whatever they wanted, no matter where the customer was located.

As a result, credit became more accessible. In 1977, prior to the Marquette decision, 38 percent of American households had at least one credit card. By 1989, it was 56 percent. Today, it's closer to 80 percent.

But bloated interest rates aren’t the only reason Delaware is attractive to credit card 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’s home to the chancery court, which expedites business court cases with judges, not juries. All told, it's why America's second smallest state looms so large in the business world.

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