Although federal regulation typically takes center stage in our updates, this one switches up the venue and begins at the state level – where a first-of-its-kind statute has stepped into the ring with potentially broader implications worthy of attention.
A federal district court in Illinois has issued a closely watched, split decision on the Illinois Interchange Fee Prohibition Act (IFPA), largely upholding the first-in-the-nation law while striking down its data-sharing restriction. The IFPA prohibits banks, payment networks, and other entities from charging or receiving interchange fees on the portion of a debit or credit card transaction attributable to taxes or gratuities. Financial industry groups challenged the law in the U.S. District Court for the Northern District of Illinois, arguing that it was preempted by federal law and would create operational complexity and disruption within established payment systems.
Judge Virginia Kendall described the matter as “a close case,” noting the absence of similar laws in other states. Ultimately, the court upheld the interchange restriction, rejecting arguments that the National Bank Act preempted the statute. In doing so, the court reasoned in part that interchange fees are set by payment networks – not banks directly – making the preemption argument less contextually persuasive. As the court explained, “[W]hile that argument definitively protects national banks from intrusion into the fees they charge on their ATMs and savings account services, it is hard to square with a state law that impacts a fee that those same banks do not set and that are not keyed to their particular services.”
The court added: “The Payment Card Networks built this ecosystem, and the Payment Card Networks set these fees. To claim that the IFPA Interchange Fee Provision impermissibly interferes with the powers set out in 12 C.F.R. § 7.4002 – which ‘should be arrived at by each bank on a competitive basis and not on the basis of any agreement’ – does not add up in the face of that reality.”
However, the court struck down IFPA’s data-sharing restriction, which prohibited parties other than retailers from sharing transaction data beyond what was necessary to complete the transaction or required by law. The court concluded that this provision was preempted, recognizing that federal law grants financial institutions broad authority to engage in data processing activities.
Though we’ve discussed them before (like in our Durbin Amendment discussion), substantively, interchange fees (which typically average around 2% of a transaction) are paid by a retailer’s bank to the consumer’s bank whenever a card is used, with those costs often passed on to consumers. Under IFPA, retailers would no longer pay interchange on the tax and tip portion of transactions, which would protect customers from paying them as well. (It may be worth pausing here to point out that when comparing to the Durbin Amendment, while there are definitely similarities worth keeping in mind, at the risk of overly simplifying things: Durbin effectively aims to regulate how much can be charged, whereas the IFPA aims to regulate what portion of a transaction can be charged.)
Supporters hailed the decision as a meaningful win for businesses and consumers and expressed hope that other states may follow Illinois’ lead, and that the elimination of “onerous swipe fees” will ultimately save businesses and consumers millions of dollars each year.
Opponents warned that separating out tax and gratuity amounts for fee calculation would require system changes, increased costs (along with “administrative headaches and longer checkout times” for small businesses), and potentially introduce fraud and operational risks. And while there may certainly be merit to their claims as to some of the expected difficulties in adopting to such a consumer-driven change – notably, amongst their arguments against the law was the idea that for “tipped and gig workers,” a shift back to cash payments would lead to fewer tips and a reduction in wages because digital tipping would become “more complicated” – but this speculation seems to be a stretch (at best). Modern customers overwhelmingly prefer digital payments, but merchants depend (more and more) on card-based systems for speed, streamlined accounting, fraud protection, and meeting customer expectations; the opponents seemingly don’t fully acknowledge the fact that the law wouldn’t prohibit or restrict digital payments – it would instead change how interchange is calculated on certain portions of the transaction.
Judge Kendall acknowledged that “there is no doubt that the IFPA presents complicated compliance challenges,” but ultimately concluded, somewhat poignantly, that “these compliance costs, among others, are undeniable. But State (and federal) laws will always require some kind of compliance cost, no matter who bears it.”
This one, as you might expect, is far from over. Industry groups, including the Electronic Payments Coalition, have announced plans to appeal and renewed calls for legislative repeal, sticking firmly to the argument that the law remains fully preempted and reiterating the warning of broader disruption to the payment system. Unless stayed, the law is set to take effect July 1, 2026 (implementation was previously delayed to allow the legal dispute to proceed). Other state legislatures are likely watching closely as the appeal process unfolds (and so, presumably, are your community banks in their respective states) because this is unlikely to be the last round in the “interchange fight,” and the eventual winner may carry that “title belt” well beyond Illinois.
The United States District Court for The Northern District of Illinois (Eastern Division) Opinion & Order can be found here: [Illinois Bankers Association et al v. Raoul, No. 1:2024cv07307 – Document 179 (N.D. Ill. 2026)]
The “current” Illinois Interchange Fee Prohibition Act can be found here: [815 ILCS 151/Art. 5]
Written by:
Brett Goodnack, JD, CAMS
Compliance Advisor