Illinois’s Attempt to Limit Credit Card Swipe Fees Sparks Legal Battle
A novel law in Illinois aimed at cutting credit card swipe fees, the so-called interchange fees merchants pay on transactions, has ignited a legal and policy fight that could have nationwide implications for consumers, businesses and payment networks.
What the Illinois Swipe Fee Law Would Do
In 2024, Illinois lawmakers passed the Interchange Fee Prohibition Act (IFPA), making the state the first in the nation to restrict certain credit and debit card “swipe fees.”
Under the law, slated to take effect on July 1, 2026, banks, card issuers and payment processors would be prohibited from charging interchange fees on the portion of transactions attributable to sales tax and gratuities (tips). Traditionally, merchants pay interchange fees, typically between about 2% and 4% of a transaction, not only on the price of goods or services, but also on taxes and tips collected at the point of sale.
Supporters of the law argue these fees are unfair because businesses are effectively charged for money they are merely collecting on behalf of the government or their employees. Retail and merchant groups contend that limiting swipe fees could lower costs for small businesses and, ultimately, consumers.
Why Banks and Card Companies Are Challenging the Law
Shortly after IFPA was passed, major banking trade groups, including the Illinois Bankers Association, American Bankers Association, credit union associations and others, filed a federal lawsuit arguing the law conflicts with federal banking and payments law.
A federal district court initially upheld the core provision banning fees on tax and gratuity amounts, rejecting arguments that the law directly regulated banks because the fees are set by payment card networks. But other parts of the law were struck down, and banking groups quickly appealed that decision.
Recently, the U.S. Court of Appeals for the Seventh Circuit sent the case back to federal district court to reconsider issues in light of new federal regulatory actions, casting uncertainty over whether IFPA will take effect as written on July 1.
Federal Regulators Enter the Fight
The legal landscape became more complex when the U.S. Office of the Comptroller of the Currency (OCC) issued interim rules indicating that national banks and federal savings associations may continue to assess and collect interchange fees under existing federal powers, potentially preempting the Illinois law.
Other federal agencies such as the National Credit Union Administration (NCUA) may also weigh in, signaling that opposition from federal regulators could influence how courts interpret the law’s reach and enforceability.
What This Means for Businesses and Consumers
If the Illinois law takes effect without being blocked or altered by the courts, businesses would likely see a reduction in swipe-fee costs for sales tax and gratuities, especially at restaurants and service businesses where tipping and card transactions are common.
However, critics argue that forcing payment networks and banks to limit fees could result in confusion at checkout, operational burdens for merchants seeking to comply, and potential impacts on how different cards are accepted. National industry groups warn that uneven compliance across banks and card processors could lead to inconsistency and uncertainty for merchants and consumers alike.
For small business owners already grappling with narrow margins and rising costs, swipe fees have been a notable expense, and many see the Illinois law as a chance to reduce one of those recurring costs. However, the ongoing legal battle raises questions about whether the law can be implemented as intended.
Why the Rule Fight Matters Beyond Illinois
Illinois’s swipe fee battle could be a bellwether for other states considering similar measures. In fact, states such as Colorado have moved forward with similar limits on swipe fees related to taxes or fees, signaling growing interest in reforming payment-processing costs.
How Illinois fares in court could influence legislative efforts in other states and shape the national conversation about who pays transaction fees and how financial services are regulated.
