Court upholds Illinois interchange prohibition

A federal judge in Chicago dealt a blow to efforts to eighty-six an Illinois law that would prohibit interchange fee assessments on sales tax and tip portions of card transactions. The Interchange Fee Prohibition Act, signed into law in 2024, had been set to take effect last July. But the state postponed enactment for a year while a banking industry challenge played out in federal district court.

In an amicus brief it filed with the court the Illinois Bankers Association, the Illinois Credit Union League and America's Credit Unions had argued that the state law was preempted by federal banking law. This position was echoed by the Office of the Comptroller of the Currency, which regulates many of the large banks that issue credit cards.

U.S. District Court Judge Virginia Kendall rejected that argument, however, asserting that interchange is set by Visa and Mastercard, not banks or credit unions.

"The payment card networks built this ecosystem, and the payment card networks set these fees," Kendall wrote in her decision, handed down on Feb. 10, 2026.

Merchant groups praised the decision. "The judge has seen clearly that it's Visa and Mastercard that run the swipe fees and that states can regulate these anti-competitive fees," said Doug Kantor, general counsel at the National Association of Convenience Stores. "Merchants provide a service by collecting taxes and tips that are turned over to the state and to employees, and it's unfair to punish them by charging them price-fixed swipe fees for doing that."

Banks will appeal

The banking and credit union group said they plan to appeal the decision.

The Electronic Transactions Association panned the judge's ruling, noting that it departs from the "sound reasoning" used when she imposed a preliminary injunction last year that kept the law from taking effect for OCC regulated banks while she considered the case.

"The questions raised in this case are critical – not only for the payments industry but for the consumers and businesses who rely on credit card transactions every day," said ETA CEO Jodie Kelley. "We are confident that the appellate court will recognize the flaws in this result and, after reviewing the issues presented without deference to the lower court's ruling, will overturn this decision."

While Illinois is the first state to pass a law banning interchange on sales tax and tips, it's not alone in tackling the issue. At least 13 other states have similar laws under consideration, including New York, Arizona and Georgia.

Sean Kennedy, executive vice president of the National Restaurant Association, addressed this domino effect of state laws in a statement issued following the court's decision.

The judge's ruling, he said, "lays a clear legal path for other states to follow Illinois' lead and address credit card processing fees – one of the highest and fastest-growing costs facing restaurant owners today. This decision shows that state legislatures can take meaningful action to rein in unfair swipe fees to support local businesses."

Durbin takes victory lap

Senator Richard Durbin, D-Ill, praised the judge's decision, asserting that the ruling aligns with the Durbin Amendment, the 2010 law that set in motion the capping of debit card interchange. "[T]he Durbin Amendment was interpreted correctly in the ruling," the senator asserted. "Both IFPA and the Durbin Amendment's purpose is to rein in centrally-fixed debit interchange fees that had been insulated from competitive market forces and result in excessively high fees that burdened merchants and consumers."

In a statement, Durbin also pressed for action on the Credit Card Competition Act. That bill, co-sponsored by Durbin and Senator Roger Marshall, R-Kan., and endorsed by President Trump, would direct the Federal Reserve to require the largest credit-card issuing banks to offer merchants a choice of at least two networks over which credit card transactions can be processed, only one of which could be controlled by Visa or Mastercard.

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