Why your US credit card bills come from Sioux Falls; a brief history of US consumer finance
Sean Vanatta’s article Citibank, Credit Cards, and the Local Politics of National Consumer Finance, 1968–1991, published in Business History Review, is the winner of the 2016 Henrietta Larson Article Award.
The essay uncovers the causes and consequences of a curious event in recent US business and economic history, Citibank’s relocation of its credit card division to South Dakota in 1980. You may have wondered why your credit card bills come from Sioux Falls (or Wilmington, Delaware). The essay provides an answer.
The story begins in the 1970s, when credit card lending wasn’t very profitable. States tightly regulated credit card interest rates through so-called usury laws, which also acted as a structural check on consumer debt accumulation. If market rates went up, bankers could not pass higher costs onto consumers. For most bankers, holding credit-card debt wasn’t worth the risk. Instead, bankers viewed credit cards primarily as a way to initiate relationships with local consumers, to whom they could then sell additional banking services.
Citibank changed all that. Beginning in 1977, Citi began soliciting cardholders across the country, constructing a nationwide consumer bank without building brick-and-mortar branches. They did so, however, just in time for market interest rates to spike under the aggressive actions of Paul Volcker’s Federal Reserve. Citi had successfully recruited over 4 million new cardholders, but its cards were still regulated by New York, a state with strict interest rate limits. Soon, Citi was losing money on every card transaction its customers made.
The bank needed a solution. It found one in South Dakota, a state that in 1980 did not regulate bank interest rates of any kind. The legal maneuvering was complicated, relying on the astute combination of an obscure Supreme Court ruling, a 1950s-regulatory loophole, and Citibank’s long experience manipulating regulatory differences across borders in its international businesses. The result was that Citi could export South Dakota’s interest rate policy to its cardholders across the country. No matter where you used your Citi-card, the transaction was governed under South Dakota law.
As banks threatened to ship their credit card jobs to the northern prairie, most states eliminated their usury ceilings. With the structural check on credit card debt lifted and banks free to set interest rates at will, capital flooded into credit card markets. For the rest of the century, credit card lending was usually about 3 times as profitable as other banking services.
Recently, scholars have been interested in the ways financial-regulatory changes have restructured the American and global financial systems since the 1970s. In the US, they have focused only on federal politics and policy, missing the essential place of states in the history of financial change. This essay, and the larger project on which it draws, recovers that role. A new, decentered picture of ﬁnancialization emerges when we examine how American firms and politicians sought to reconcile, and later exploit, the contradictions of a regulatory system ordered by state boundaries and new mobile ﬁnancial instruments that could move beyond them.