Page 30 - gs260301

Insights and Expertise

Illinois interchange law survives

court challenge: Networks must

prepare for July 1 implementation

By Leo Arzumanyan wrote. Since networks establish the fee schedules and
Global Legal Law Firm banks just receive the revenue, the court found Illinois can
regulate how those fees are calculated without interfering
llinois' Interchange Fee Prohibition Act (IFPA), the with federal banking powers.
first-in-the-nation ban on charging interchange fees
on taxes and tips, survived a major legal challenge This matters because previous court decisions protected
I on Feb. 11, 2026, setting up a July 1, 2026, imple- banks from state laws that directly restricted fees banks
mentation deadline that will require significant system themselves charge (like ATM fees). But the court saw
changes across the payments industry. interchange differently: it's set by Visa, Mastercard and
other networks on behalf of the entire ecosystem.
However, the same federal court struck down the law's Impact on revenue
data usage restrictions, creating a split outcome: payment
networks must build new infrastructure to exclude taxes Illinois has roughly 9 percent average sales tax (10.25
and tips from interchange calculations, but can continue percent in Chicago). Add gratuities in restaurants and
using transaction data for fraud prevention, rewards hospitality, and Illinois' attorney general estimates the
programs and other purposes. The ruling opens the door law will reduce interchange revenue by 9 to 10 percent
for similar legislation in 22+ states considering interchange on Illinois transactions. The industry argued this could
regulations. devastate profit margins, but the court said compliance
costs alone don't trigger federal preemption.
What the law does
Implementation challenges:
The Illinois Interchange Fee Prohibition Act does two
things: What networks and processors must build
The technical lift is substantial. According to declarations
1. Bans interchange on taxes and tips: Starting July submitted in the case:
1, card networks, processors, acquirers and issuers
cannot charge merchants interchange fees on the tax • Visa and Mastercard estimated millions of dollars
and gratuity portions of transactions. Merchants must in compliance costs and warned implementation
separately identify these amounts in transaction data. could take "months if not years."
If they can't do it in real-time, they have 180 days to • New data fields must be created to separately cap-
submit documentation for reimbursement. Violations ture tax and gratuity amounts.
will result in $1,000 per transaction. • Authorization and settlement systems need modi-
fication to calculate split-basis interchange.
2. Restricts data usage (mostly struck down): The law
originally prohibited using transaction data for any- • Manual processing workflows must be built for
thing beyond processing the immediate transaction. merchants who submit tax documentation after the
The court found this violated federal banking law and fact (up to 180 days later).
blocked enforcement against most financial institu- • Issuers need systems to match late merchant sub-
tions and networks, but the restriction still applies to missions to specific transactions and process re-
some out-of-state credit unions and savings institu- funds within 30 days.
tions.
The court's ruling: Networks and processors have less than five months until
the July 1 deadline.
Why interchange restrictions survived
The data usage win … with complications
Banks and card networks argued that federal banking law
prohibits states from regulating interchange fees. Chief The court blocked enforcement of the data usage restric-
Judge Virginia Kendall disagreed, focusing on one critical tions against:
fact: payment networks set interchange rates, not banks.
• National banks
"All Parties agree that the Issuers and Acquirers do not • Federal credit unions and savings associations
set those fees; the Payment Card Networks do," the court
30