Sean H. Vanatta—
Big banks charge the highest credit card interest rates, at least according to the Consumer Financial Protection Bureau (CFPB). In February, the agency reported that some of the largest banks—including Capital One, the third largest, and Citigroup, the second—routinely charge consumers more than 30 percent on their outstanding balances.
Three days after the CFPB’s report landed, on cue Capital One announced plans to acquire Discover, a move that, if approved, would launch it to the top of the credit card heap.
Capital One should not crown itself king of the plastic mountain just yet. The merger promises a knock-down, drag-out regulatory fight. But the proposed union highlights three important facts: the credit card market has a tendency toward concentration, the banks which charge the highest prices tend to absorb less extortionate rivals, and the consumers who borrow to buy pay extraordinary prices to seed the profits of plastic capitalism.
The historian’s move here is to say: it hasn’t always been this way. When Chase Manhattan Bank—predecessor to today’s JPMorgan Chase—launched its credit card plan in 1958, the bank charged 12 percent interest. After losing money for a couple of years, executives determined that they might turn a profit if they raised their rates to 18 percent.
The executives couldn’t stomach it. “We simply could not see ourselves charging customers 18 per cent—even though the servicing costs fully justified the charge,” Chase Chairman David Rockefeller recalled.1 For a time, they abandoned the business.
Other bankers could and did charge higher rates. As bank card plans grew gradually until the mid-1960s and then rapidly thereafter, consumers realized that they could not trust bankers’ collective moral compass to guide the industry toward fair credit prices. If they wanted protection, consumers needed laws.
Consumer groups and their political allies waged sustained campaigns across the 1960s and 1970s to control the price of credit. They did so as part of a broader movement to construct the rules of the credit card market, so that it would provide safe, low-cost credit that facilitated convenient shopping, rather than expensive credit that trapped households in long-term debt.
Most of the political action unfolded at the state level. Before the 1980s, federal rules largely confined banks to individual states, a strategy which restricted banking concentration and made banks accountable to local stakeholders. Consequently, state law determined questions like how many branches a bank could have or what interest rates it could charge.
Confining banks within states and holding them accountable to state law made sense in a world where the bank was a place—brick and mortar, marble and steel. But by the mid-1970s, some bankers began to reimagine the business of banking as one that was placeless—one which could as easily transpire through a plastic card as a teller window. Cards, unlike banks, could move.
This tension between mobile plastic and place-based credit regulation strained and then broke in the late 1970s, eventually ending the political economy of small finance which had prevailed in the United States since the New Deal. This change ushered in a new era of consolidation and concentration.
In the drama that unfolded, Citibank was the key protagonist. In 1977, the New York bank took the card-as-bank strategy for a spin, mailing millions of unsolicited card applications to consumers across the country.
Up until that time, bank credit cards had remained rooted in state-defined geographic markets. Bankers solicited nearby consumers and signed up neighborhood merchants. Nationwide networks—BankAmericad (Visa) and Master Charge (MasterCard)—united local card plans, but bankers still conceptualized the card market as bound by the limits of their physical branch networks.
Citibank executives saw the world differently, in part because Citi was a different kind of bank. Although Citi could not build domestic branches outside of New York State, it could and did maintain branch offices around the globe. As the leading international U.S. bank, Citi executives became especially adept at crossing national boundaries and reimagining regulatory space to find the most advantageous “location” for their business, regardless of where transactions seemed to take place. In other words, Citi bankers were wizards of offshore finance.
In the 1970s, international financial competition heated up, and executives turned their skills back towards the domestic market. Citi’s 1977 “Credit Card Blitz,” as the headlines termed it, netted the bank millions of new cardholders. It also set a trap.
Citi had set out to create a nationwide consumer bank through cards, yet the issued cards were still regulated within the bank’s home state of New York. Citi-cardholders paid between 12 and 18 percent interest, depending on their outstanding balance. New York barred annual card fees.
Here was the problem: banks borrow the money they, in turn, lend to consumers. In the late 1970s, persistent inflation drove Federal Reserve policymakers to raise benchmark interest rates, which increased Citi’s cost of funds. But because of New York’s strict price controls, the bank could not pass those rates onto consumer borrowers. Then, in August 1979, President Jimmy Carter appointed Paul Volcker Chairman of the Federal Reserve. Volcker, determined to burn inflation out of the economy, began a policy experiment we now call the Volcker shock. Market rates skyrocketed and so did Citibank’s cost to borrow the money it lent to consumers through cards.
And so Citi was trapped, its costs surging, its rates capped, and millions of consumers racking up balances. The bank needed a way out. Its lawyers found one, through something called the Bank Holding Company Act of 1956. The law allowed Citi to acquire a bank in another state—in this case one without New York’s strict interest rate caps—if that state’s legislature invited Citi to do so. After a hurried courtship, in March 1980 South Dakota invited Citi in.
The consequences are hard to overstate. Before Citibank’s move, states had regulated credit prices within their borders. Afterwards, states competed to lure in out-of- state banks, and the jobs and tax revenues they promised, by rolling back interest rate restrictions and other consumer protections. Within a year, Delaware enacted identical legislation, soon welcoming Chase Manhattan and a clutch of other large New York banks.
Freed from New York’s interest rate restrictions, Citibank raised cardholder interest rates and added an annual fee. Other large banks followed. What ensued is what I call a Gresham’s Law of Plastic: bad plastic money crowded out the good. Banks which charged high rates and generated high revenues also marketed cards more heavily.
For consumers, the convenience of taking cards often outweighed the costs in time and attention of finding the best card deals. Revenues accrued to the largest banks, which reinvested in more credit offers.
At the same time, removing state interest rate limits enabled banks to repurpose cards from safe, low-cost credit that facilitated convenient shopping into expensive credit that trapped households in long-term debt. Price controls had made it risky for banks to extend long-term credit through cards. Citi’s experience demonstrates this vividly: rising market rates made its card plan unprofitable. But with state restrictions removed, bankers could flood credit into consumer households, knowing that if market rates went up, they could always pass the costs on through higher credit card interest rates.
And so here we are. The graph below shows total revolving credit from 1968—roughly the beginning of the bank credit card industry—until January 2024. It shows a steady upward climb in credit card debt until the 2008 financial crisis, a period of retrenchment as some households paid off their debt and others defaulted. In 2020, the government’s huge Covid mitigation efforts put cash in Americans’ pockets, which they used to pay down their card debt.
Since May 2021, the nation has been charging up credit card mountain. Inflation has made credit necessary, rising interest rates has made it more expensive. It’s hard to imagine a happy ending to this story—unless you’re Capital One, that is.
Sean H. Vanatta is a lecturer in economic and social history at the University of Glasgow and a senior fellow at the Wharton Initiative on Financial Policy and Regulation at the University of Pennsylvania. He lives in Glasgow, Scotland.
1. David Rockefeller, Creative Management in Banking (McGraw Hill, 1964), 21.
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