Illinois legislature votes to delay controversial interchange law

An Illinois law that would have exempted tips and tax payments from card interchange looks like it's off the table, for now. The contentious law, known as the Interchange Fee Prohibition Act, was panned by financial institutions and other payment services providers, and had been scheduled to take effect on July 1.

An 11th-hour delay to July 1, 2026, was approved by the Illinois General Assembly. Now it's up to the governor, J.B. Pritzker, to sign or veto the legislation.

Bankers in the state said they are optimistic Pritzker will sign the bill, which only delays implementation, noting that State Senate President Don Harmon voted to pass the measure, saying he was only doing so to allow time to complete the court challenge. From there, he said he hoped the IFPA would eventually go into effect.

Bankers, regulator, pan exempting tips and taxes

The Illinois Bankers Association, the Illinois Credit Union League, the American Bankers Association and America's Credit Unions filed a complaint seeking declarative and injunctive relief with the U.S. District Court for the Northern District of Illinois, to stop the law from taking effect, as planned, on July 1.

The Office of the Comptroller of the Currency, along with The Clearing House, Bank Policy Institute and the Consumer Bankers Association all filed amicus briefs supporting the IBA and ICUL. Several other organizations, including the Electronic Transactions Association and the Electronic Payments Association, wrote letters to the governor and/assembly leaders requesting them to eighty-six the law.

Unsurprisingly, Senator Dick Durbin, the Illinois Democrat for who authored the law regulating debit card fees, filed an amicus brief supporting the state's position prohibiting interchange assessments on the tip and sale tax amounts on purchases made using credit, debit and prepaid cards.

"We will now ask the legislature to quickly transmit the bill to Governor Pritzker and then encourage the governor to sign the extension expeditiously," the IBA wrote in a statement. "The legislature has 30 days to transmit the bill to the governor, and he has up to 60 days to act on the measure. Our goal will be to have the bill signed prior to the current July 1 effective date."

Large retailers would be winners if IFPA takes effect

A study published last fall by the EPA found that if the IFPA went into effect the winners would be big retailers. "40 of the largest retailers will soak up nearly 40 percent of the estimated $118 million reduction in interchange," the EPA wrote. The "top 10 largest retailers" – Amazon, Walmart, Home Depot, Verizon, apple, AAT&T, Costco, CVS, Walgreen and Kroger – will get better than 21 percent of the savings, EPA claimed.

On the other hand, small businesses will see costs rise, as many will need to swap out POS devices to accommodate the change.

This unbalanced set of benefits is similar to what happened when the Durbin Amendment took effect, capping interchange on debit card payments.

"This unnecessary law will create significant implications on Illinois businesses and consumers, with no known path forward at this time," Alex Cabrera, owner of Lalos Restaurant in Chicago, said in a statement published by EPA. "As a business owner, I am very concerned about the costs of this implementation on small businesses and that the benefits will only go to big box retailers."

At least five other states have laws under consideration that would exempt tip and tax amounts from interchange. They are: California, New York, New Jersey, Florida and Texas.

Durbin all over again

An EPA report echoes findings from a University of Miami study which found legislation currently before Congress – the Credit Card Competition Act – would put small businesses "at a further competitive disadvantage" because almost all of the savings would accrue "to retailers with $500 million or more in annual sales, with little going to small businesses."

The Credit Card Competition Act would require card issuers to program the cards they issued so that merchants would be able to choose between two different networks for processing transactions, only one of which could be owned by Visa or Mastercard.

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