With roughly 30 states considering similar legislation, the outcome in Illinois will determine whether the state’s law becomes a replicable national template for reducing interchange fee revenue — or is neutralized on its home ground before other states can follow.
Illinois’s first-in-the-nation law banning credit card interchange fees on the tax and tip portions of consumer transactions faces a coordinated industry repeal campaign, a threatened federal preemption order and a pending appeals court ruling — all converging before the law’s July 1 effective date.
The Electronic Payments Coalition, representing banks, credit unions and card companies, has run a seven-figure advertising campaign warning of “credit card chaos” if the Interchange Fee Prohibition Act is not repealed. The Illinois Retail Merchants Association called those warnings a “complete fabrication,” saying compliance requires nothing more than a software coding change.
With roughly 30 states considering similar legislation, according to Ben Jackson of the Illinois Bankers Association, the outcome in Illinois will determine whether the state’s law becomes a replicable national template for reducing interchange fee revenue — or is neutralized on its home ground before other states can follow.
What the law does
The Interchange Fee Prohibition Act bars financial institutions from charging swipe fees on the tax and tip portions of consumer bills and prohibits them from recovering those fees elsewhere. Interchange fees — typically around 1% to 2% of a transaction’s cost, set by Visa and Mastercard — are paid by the retailer’s bank to the consumer’s bank each time a card is used. Retailers have long objected to paying those fees on sales tax and tips, arguing they do not keep that portion of the transaction.
Under the law, retailers may petition their financial institutions for reimbursement of any fees charged on taxes and tips within 180 days of a transaction. Institutions that fail to comply within 30 days face civil penalties of $1,000 per transaction.
Dueling claims on compliance
The coalition argues the global payment system processes only a transaction’s grand total — not its component parts — and that retooling it would require coordination across the industry and with international standards bodies at a cost too large to meet a July 1 deadline.
“The global payment system is not set up to where any one party to a transaction can make this happen on their own,” Ashley Sharp, of the Illinois Credit Union Association, said Wednesday at a Springfield news conference. “There are multiple parties to every electronic transaction.”
Karr of the Illinois Retail Merchants Association dismissed that argument. A standard restaurant receipt already displays the subtotal, sales tax, tip and grand total, he said. “All they have to do is move their fee from the grand total to the subtotal.”
Financial stakes
The tax-and-tip prohibition would reduce interchange fee revenue for banks and credit unions by approximately 10 percent, Capitol News Illinois reported. The Illinois Retail Merchants Association estimated retailers would capture “north of $200 million” currently transferred to financial institutions. The Electronic Payments Coalition put the figure at $118 million and noted about 40 percent of that windfall would go to the 40 largest retailers.
Legal front
Financial institutions challenged the law in federal court and lost. U.S. District Judge Virginia Kendall determined in February that Illinois is within its rights to regulate interchange fees. Kendall acknowledged the disruption the law would impose, writing that “the Interchange Fee Provision is indisputably disruptive, requiring additional investments, hires, and new procedures to replace the current process for authorizing and settling debit and credit card transactions.” But she placed the compliance burden on the industry: “these entities understand the onus of IFPA compliance is on them.”
Kendall did partially reject a provision restricting data sharing, a ruling credit unions say creates inconsistent requirements across different types of institutions.
The case is pending before the Seventh Circuit Court of Appeals, with oral arguments scheduled for May 13. A ruling may not come before the July 1 effective date.
On April 16, the federal Office of the Comptroller of the Currency — a division of the U.S. Treasury Department — appeared poised to issue an order preempting Illinois’s law, though the order had not been published by late in the day. “While the office has failed to explain their reasoning or allow public review, it’s clear the goal is an end-run around the legal process after a judge recently upheld the law,” Karr said.
How the law came to pass
The Interchange Fee Prohibition Act was tucked into the May 2024 state budget, giving financial institutions little time to mount a legislative opposition before its passage. Gov. JB Pritzker and lawmakers agreed to raise approximately $101 million in revenue by capping the “retailer’s exemption” — a tax break retailers receive for acting as the state’s de facto sales tax collectors — at $1,000 per month. Retailers, unwilling to absorb that change without concession, successfully lobbied for the long-sought tax-and-tip fee exclusion.
Financial institutions quickly sued after the law passed. To avoid uncertainty as that litigation proceeded, lawmakers delayed the effective date from July 1, 2025 to July 1, 2026.
Legislative prospects
State Rep. Margaret Croke, D-Chicago, is sponsoring a bill to fully repeal the Interchange Fee Prohibition Act. As of last week, however, she said she was not planning to move it, and considered a further delay in implementation more likely than outright repeal.
“If this is a policy that the state of Illinois decides they’re going to want to have, then we need to make sure we’re doing it properly,” Croke said.
Karr said the industry’s warnings amounted to a pressure campaign, not a genuine forecast. “There is no need for chaos,” he said. “The only chaos is if the credit card companies impose it themselves on their consumers.”