More on Usury Laws - CardsFTW #171

Lots of history and footnotes this week; just one image. Let's be honest - images for "usury" aren't particularly kind.

Usury Laws -> Credit Cards

Credit cards live at the intersection of law, banking, and consumer behavior. Their interest rates (Annual Percentage Rates or APRs) aren’t just the product of lender risk models or macroeconomic trends. They’re also profoundly shaped by a legal history that began in state legislatures, shifted in a single Supreme Court ruling, and still dictates how Americans pay interest on their plastic today. To understand why the average credit card APR is now north of 22 percent, you have to go back to the story of usury laws, South Dakota’s open arms, and the race among states to attract financial institutions.

For most of U.S. history, state usury laws capped how much lenders could charge because of religious norms. Early Christian leaders such as Ambrose of Milan and St. Augustine condemned the practice outright, equating it with greed and exploitation. Interest was seen as money “breeding” money, which was unnatural because money itself was sterile: It didn’t produce anything real.

By the fifth century, the Catholic Church codified prohibitions against usury, aligning it with sin. The Council of Nicaea (325 CE) prohibited clergy from engaging in lending at interest. Later councils, like the Third Lateran Council (1179) and Council of Vienna (1311–12), explicitly banned usury and threatened excommunication for violators.

Thomas Aquinas, in the 13th century, reinforced the theological argument that since money was just a medium of exchange, charging for its use was unjust. He compared it to selling the same thing twice. For centuries, usury was considered a grave sin in Catholic Europe.

Following this practice, states in the U.S. had usury laws, which acted as a straightforward consumer protection. Banks couldn’t impose rates above a certain threshold, often between 9 and 12 percent APR. For decades, this worked because rates were stable and inflation was low.

When inflation spiked in the 1970s, in the relatively early days of the credit card, usury caps made credit lending impossible: Inflation pushed market interest rates up, and suddenly, banks in high-rate environments couldn’t lend profitably under their state’s caps. Credit card issuers, who already took on higher risk than mortgage lenders, were especially squeezed.

The landmark court case Marquette National Bank v. First of Omaha Service Corp (1978) changed everything. The Court held that a national bank could export the interest rate laws of its home state to borrowers nationwide. That meant if your bank charter was in a state with no usury cap, you could charge whatever rate you wanted to a customer in California, New York, or Texas, even if those states had stricter laws. The ruling instantly made certain states more attractive than others. Banks didn’t just ask, “Where do we want to be regulated?” They asked, “Which state will let us price credit without handcuffs?”^[1]

South Dakota seized this opportunity: Facing economic decline and high unemployment, Governor Bill Janklow pitched to Citibank in 1980: Relocate your credit card operations here, and we’ll lift our usury limits (which Citibank did). Delaware quickly followed, passing its own Financial Center Development Act in 1981. The result was a massive shift in the geography of consumer finance. Sioux Falls and Wilmington became capitals of the credit card industry, not because of deep local banking traditions but because lawmakers rolled out legal red carpets.

The migration of issuing banks wasn’t just about geography: It reshaped consumer finance. Free from strict rate caps, issuers expanded credit access to more Americans, including riskier borrowers. Today, credit cards charge a lot of money (and can charge more than other similar loans, due to branding (see CardsFTW #154)

With the exportation of usury rates, interest rates rose, and the gap between the safest and riskiest cardholders widened. Critics argued that deregulation ushered in an era of households paying steep prices for short-term credit. Supporters countered that flexible pricing enabled innovation, rewards programs, and broader access.

Where Utah Comes In

Careful watchers of cardholder agreement documents, may have noticed a lot of smaller banks based in Utah participating in new card programs. Salt Lake City is a hot-bed of fintech sponsor banks. This can be explained in part by the passage of the 1987 Competitive Equality Banking Act (CEBA), which expanded the definition of “bank” to include industrial local corporations (ILC).

Industrial banks occupy a weird space in that they are state-chartered and still eligible for FDIC insurance, can generally do what most banks can do (although there are limitations), and are exempted from the technical definition of a “bank” under the purposes of the Bank Holding Company Act of 1956. Most specifically, a corporation can own an ILC, where banks must be owned by a financial institution. Industrial giants like BMW and Optum own ILCs. Other household (-ish) names with ILCs include store card issuers like Sallie Mae, Comenity, and Square.

A key difference between banks and ILCs is that (per the Utah Department of Financial Institutions):

Industrial banks are authorized to make all kinds of consumer and commercial loans and to accept federally insured deposits, although an industrial bank may not accept demand deposits if the bank has total assets greater than $100 million.

So it’s hard for these banks to run a lot of consumer funds, but they love sponsoring loans.

Why Utah? A key reason is that industrial banks can only be commercially owned in states requiring FDIC insurance, which is only law in seven states: Colorado, California, Hawaii, Indiana, Minnesota, Nevada, and Utah. The last industrial bank in Colorado became inactive in 2009, leaving only six states with active industrial banks.

Utah has 15 industrial banks, the most of any state, and holds more than 90% of all industrial bank assets. ^[2] The Utah government has been very friendly to chartering new ILCs that serve fintechs. So friendly, the state has a webpage dedicated to defining them! Some of the most popular fintech credit card and loan programs are issued from banks chartered as ILCs in Utah: Celtic, WebBank, and WEX Bank are just a few. As for rates? Utah doesn’t have a cap. There is an “unconscionability” provision, but this gives these banks flexibility in sponsoring (and exporting) high rate loans and cards.

CNBC did a nice dive into this last year and this 3-minute video is a good tl;dr.

Lending in a Post-Marquette Economy

Today, credit card APRs are higher than ever. Federal Reserve data shows that as of May 2025, the average credit card interest rate on accounts carrying a balance, what economists call “accounts assessed interest”, hit 22.25 percent^[3]. That’s the highest level in decades, reflecting the Federal Reserve’s rate hikes and the structural reality that credit card debt is unsecured and risky.

The averages hide significant differences: The Federal Reserve Bank of Philadelphia tracks credit card terms across the industry. In the first quarter of 2025, it reported that the average APR on active general-purpose card balances was 24.62 percent^[4], with origination APRs, which new accounts are offered, clocking in at 27.29 percent ^[5]. That’s not just sticker shock; it means that a consumer carrying a $5,000 balance could be paying more than $1,300 a year in interest, even before fees. For context, the spread between prime lending rates and card APRs is now more than 17 percentage points, the widest in modern history^[6].

CFPB research shows that large banks consistently charge higher APRs than smaller institutions. For borrowers with “good” credit scores, large-issuer general-purpose cards averaged a 28.20 percent APR in 2023, compared to just 18.15 percent from smaller issuers^[7]. That ten-point spread translates into hundreds of dollars a year in extra costs. In fact, the CFPB estimates that large-bank pricing leads to $400 to $500 in additional annual interest costs on a typical $5,000 balance^[8]. Why? Market power. The most significant players—Chase, Citi, Bank of America—know that their cards’ rewards programs and brand recognition keep customers loyal, even if their rates are higher.

That discrepancy raises thorny policy questions. Usury laws once aimed to protect borrowers from exorbitant rates. After Marquette, that safeguard became irrelevant for nationally chartered banks. States lost the ability to enforce local caps, and consumers lost the protection of their own legislatures. Today, the only real check on credit card APRs is competition, and that competition appears scant. National banks are offering cards up to 34%. Anecdotally, and based on specific laws and regulations 36% is the next threshold keeping rates down (for now). The stakes are massive, with total credit card balances exceeding $1.2 trillion in 2024.^[9]
Senator Elizabeth Warren and Representative Alexandria Ocasio-Cortez have proposed pegging maximum APRs to a spread above the prime rate, echoing historical norms. Sen. Bernie Sanders has suggested a national 10% cap, which would likely end credit cards as we know them. Proponents of the current system warn that hard caps would restrict credit access, pushing subprime borrowers out of the mainstream system and into payday loans or informal credit (which is much more expensive and risky).

Credit cards remain the most convenient form of unsecured lending in the U.S., with near-universal acceptance and rich rewards. However, the financing costs are climbing fast, and the differences between different-sized card issuers are stark. If you bank with a giant, you’re probably paying more. If you hunt for a community bank or credit union card, you might save hundreds of dollars a year in interest, though you may give up the kind rewards program I love to write about. You might not, as some credit unions, which have their own limitations on APRs, have great programs for qualifying members.

Credit card APRs are ultimately a story of American federalism and the unintended consequences of deregulation. A Supreme Court ruling meant to clarify interstate banking rules instead transformed Sioux Falls and Wilmington into financial hubs, wiped out state-level consumer protections, and left borrowers at the mercy of issuer pricing power. Forty-five years later, the consequences are showing up in household budgets nationwide, one monthly statement at a time.

CardsFTW

CardsFTW, released weekly on Wednesdays, offers insights and analysis on new credit and debit card industry products for consumers and providers. CardsFTW is authored and published by Matthew Goldman and the team at Totavi, a boutique consulting firm specializing in fintech product management & marketing. We bring real operational experience that varies from the earliest days of a startup to high-growth phases and public company leadership. Visit www.totavi.com to learn more.

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