Banks get upper hand in yearslong fight after federal rule changes, court interpretation
By JERRY NOWICKI
Capitol News Illinois
jnowicki@capitolnewsillinois.com
Article Summary
The legislative and judicial branches dealt a pair of blows to a state law banning “swipe fees” being applied to the tax and tip portion of a debit or credit card transaction.
Lawmakers delayed the ban for another year, until July 1, 2027.
But a federal judge also issued a permanent injunction against it, citing federal rules that were recently rewritten by the Office of the Comptroller of the Currency.
The injunction only applies to national banks, federal savings associations, payment networks and out-of-state banks. It doesn’t apply to state-chartered institutions, causing further uncertainty.
The latest moves leave Illinois’ first-in-the-nation law in both legislative and judicial limbo.
This summary was written by the reporters and editors who worked on this story.
SPRINGFIELD — An Illinois law banning “swipe fees” on taxes and tips — already delayed twice by lawmakers — appears to be on life support after a federal judge that once permitted it issued a permanent injunction against it this week.
U.S. District Judge Virginia Kendall issued the injunction just hours after the General Assembly approved a further one-year delay to the Interchange Fee Prohibition Act — subject of the ongoing “Credit Card Chaos” advertising campaign — before adjourning its spring session.
It’s the latest development in a yearslong fight between retailers and financial institutions about a fee that’s levied on every credit and debit card transaction.
Each time a shopper swipes their credit or debit card, it sets off a complicated string of payments between banks. The retailer’s bank pays an “interchange fee,” typically around 1-2% of the transaction cost, to the consumer’s bank. The fees include both a set amount and a percentage of the transaction, but the credit card companies, namely Visa and Mastercard, control how they’re calculated.
The Illinois law would have prohibited financial institutions from applying the fee to the tax and tip portion of bills. Banks and retailers have estimated it would affect $120 million to $200 million in revenue or more each year — to the benefit of retailers and chagrin of banks. Illinois would be the only place where such a law was implemented.
The law was slated to take effect July 1 after already being postponed from its 2025 effective date. If Gov. JB Pritzker signs the latest delay, its effective date would be July 1, 2027.
But it’s Kendall’s Monday ruling that casts the measure into further doubt.
Judicial history
Kendall in February ruled that the law could take effect, based largely on her interpretation of administrative rules written by the federal Office of the Comptroller of the Currency, an independent subsection of the U.S. Treasury.
Kendall had ruled that because the fees are set by third parties — the card companies — they’re not preempted by the federal laws and regulations that give banks wide latitude to determine their own fees.
But the OCC, in a pair of April filings, rewrote the language at question and issued an order specifically preempting Illinois’ law.
“Although the OCC believes that (Section) 7.4002 (the section discussed in the lawsuit) already allows national banks to impose fees that are set by a third party, the OCC is revising (Section) 7.4002 to make that explicit and resolve any uncertainty about the scope of the regulation,” the agency wrote in the filing in direct response to Kendall’s ruling.
Read the filings: Preemption of Illinois law | Restatement of National Banking Act
At the time, the case was before the 7th Circuit Court of Appeals. But the court sent it back to Kendall for a reinterpretation of the new OCC filings. Addressing that change, Kendall wrote this week: “It is obvious from the face of the new rule that the modified language tees up an express conflict with the IFPA.”
Ultimately, Kendall decided Illinois’ law is now preempted by the federal rules, at least as it pertains to national banks, federal savings associations, payment networks and out-of-state banks.
The Electronic Payments Coalition — the bank-backed entity that’s been running the “Credit Card Chaos” ads — welcomed the ruling. But they warned it further creates an unlevel playing field.
“Even with this decision, credit unions and Illinois-chartered banks remain subject to IFPA, creating ongoing uncertainty and the risk of inconsistent treatment for parties in the same transaction,” the group said in a statement.
Kendall had previously issued a similar injunction on a portion of the law regarding data collection, applying it to only some financial entities.
What happens next isn’t immediately clear, but further judicial review is almost guaranteed, with both sides weighing their legal options.
Legislative history, debate
The law was enacted two years ago at the behest of the Illinois Retail Merchants Association.
Pritzker and lawmakers in 2024 agreed to raise about $101 million in revenue to plug a budget hole by putting a $1,000 monthly cap on the “retailer’s exemption,” a tax break retailers claim for being the state’s de facto sales tax collectors.
Late in the legislative process, IRMA successfully lobbied for the long-sought tax and tip exemption to alleviate the financial impact of the exemption cap for retailers.
The financial institutions argue the electronic payment system as it exists today can’t segregate the tax and tip portion of a transaction, which could result in “credit card chaos” in Illinois if the law was to become effective.
Instead of complying, according to the coalition’s literature, the card companies could just stop processing cards altogether in Illinois. They could also stop processing tax and tip portions or require two separate swipes for the subtotal and the tax and tip portion of bills.
“Electronic payments rely on a highly interconnected network that requires a uniform national standard,” the Electronic Payments Coalition said in a statement. “We will continue working through the courts and with policymakers to ensure that all participants in the payments system are treated consistently, so the customers they serve will also be protected from the harm IFPA will cause.”
But Rob Karr, president and CEO of IRMA, has forcefully disputed the “chaos” claim.
“This industry had had two years to figure this out. Instead of using their vast resources to solve problems, they're doing all they can to distract, distort, delay and demonize,” Karr testified in a House committee over the weekend.
The Merchant Payments Coalition, a group of retailers and similar businesses that advocates on credit and debit card issues, argued the new rule gives financial institutions dangerously broad fee-setting authority.
“The revised language could apply broadly to numerous categories of consumer financial charges, including late fees, overdraft or over-limit fees, annual card fees, ATM fees and similar charges,” the MPC said in a statement. “By eliminating the expectation of independent competitive pricing, the rule risks encouraging industry-wide fee standardization at the expense of consumers and merchants alike.”
While Kendall said Illinois’ law is indeed preempted for certain institutions, she also faulted the OCC for using emergency authority to implement new rules. And she criticized the order specifically preempting Illinois’ law, writing that much of the logic contained in it “perches atop the catch-all justification of this is how things are done around here.”
“What the Order’s argument overlooks, however, is that the IFPA does not impede national banks’ ability to participate in card networks, nor does it require them to engage in “costly negotiations” to maintain that participation,” Kendall wrote. “Instead, it reduces the portion of a transaction upon which a fee could be calculated.”
Capitol News Illinois is a nonprofit, nonpartisan news service that distributes state government coverage to hundreds of news outlets statewide. It is funded primarily by the Illinois Press Foundation and the Robert R. McCormick Foundation.
