Judge Virginia Kendall of the Northern District of Illinois ruled that out-of-state financial institutions operating in Illinois may continue to follow standard Illinois interchange fee law. The new legislation does, however, cover more financial institutions, such as Illinois-based financial institutions, credit unions (both state and federally chartered), and card networks that must comply with the Illinois Interchange Fee Prohibition Act (IFPA).
Key Takeaways
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Illinois Interchange Fee Law
Illinois interchange fee law issued new taxation standards processed between banks, credit card companies, and merchants. The Illinois Interchange Fee Prohibition Act now prevents financial institutions from charging a ‘swipe fee’ on tips and gratuities.
Interchange rates typically range from 1.6% to 2.4% for credit cards and 0.5% for debit cards. Below is a breakdown of fees for the four major credit card networks:
- Visa: 1.6% - 2.6%
- Mastercard: 1.6% - 2.5%
- American Express: 2.3% - 3.5%
- Discover: 1.55% - 2.5%
The Interchange Fee Prohibition Act, passed last spring, bans fees on tips and gratuities in card transactions starting July 1. However, fees will still apply to the rest of the purchase. The state will now limit merchants to a maximum of $1,000 monthly for collecting sales tax on its behalf. Previously, merchants received 1.75% of the total sales tax collected each month.
Interchange fee news outlets report several lawsuits from banks, arguing the law conflicts with federal regulations and that financial institutions would struggle to comply by the deadline. They claim banks and credit card companies would need costly new systems to separate transaction amounts from tax and tip.
However, many merchant credit associations, including the state’s largest retailer association, say the transition will be manageable since similar fee restrictions already exist for certain purchases.
Rob Karr, president and chief executive of the Illinois Retail Merchants Association, states, “This ruling is a positive step forward, ensuring credit card companies and processors that unilaterally dictate swipe fees must comply with this law.” He continues, “By limiting swipe fees that can be charged on the tax and tip portion of transactions, Illinois will provide real relief to consumers and businesses who have long suffered under the opaque swipe fee payment structure.”
Illinois State Credit Union and State Chartered Banks Challenge IFPA
Opposers to the IFPA warn that restricting interchange fees reduces the convenience and safety benefits credit card companies can offer customers. The American Bankers Association, the Illinois Bankers Association, America’s Credit Unions, and the Illinois Credit Union League filed a complaint in the U.S. District Court detailing several federal statute violations. A primary concern, citing the National Bank Act and the Federal Credit Union Act, cannot be enforced against national or state-chartered banks, federal or state savings institutions, federal or state-chartered credit unions, or their service providers.
In December, Federal Judge Virginia Kendall of the Northern District of Illinois issued a preliminary injunction blocking the law from applying to federally chartered banks once enacted. Last week, she declined to extend this protection to credit unions and state-chartered banks but did include out-of-state banks operating in Illinois.
Financial institutions urged Kendall, and so far, they have concurred that federal regulations govern out-of-state banks, preventing state intervention. These injunctions are temporary while the case proceeds.
“[The] ruling illustrates the fundamental flaws of this misguided state law that will inflict chaos on all participants in the Illinois payments system and the customers they serve,” stated Ben Jackson of the Illinois Bankers Association and Ashley Sharp of the Illinois Credit Union League. “We will continue our efforts to ensure that all consumers, businesses and financial institutions are spared the mayhem IFPA will trigger.”
The Future of Interchange Fee Law
As more states follow similar legislation, the financial ecosystem resonates with new excitement while lawmakers brace for the change.
“Co-plaintiffs will be carefully reviewing the ruling with regard to credit unions to consider next steps,” The Illinois Bankers Association and the Illinois Credit Union League responded in a joint email. “Today’s ruling illustrates the fundamental flaws of this misguided state law that will inflict chaos on all participants in the Illinois payments system and the customers they serve. We will continue our efforts to ensure that all consumers, businesses, and financial institutions are spared the mayhem the IFPA will trigger.”
