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Insights and Expertise
• Out-of-state state banks
• Payment networks and processors (when support- The Illinois effect:
ing the above institutions) states eye their own interchange limits
These entities can continue using transaction data for Illinois may be the first state to pass a law ban-
fraud monitoring, rewards programs, dispute resolution, ning interchange fees on the tax and gratuity
AML compliance and analytics. portions of card transactions, but it is unlikely
to be the last. In fact, the Interchange Fee Prohi-
But here's the catch: the restriction still applies to out-of- bition Act (IFPA) has already triggered a wave
state state-chartered credit unions and some savings in- of legislative interest around the country as law-
stitutions. This creates a compliance patchwork where makers examine whether similar restrictions
networks must track which institutions are exempt and could reduce merchant costs.
which aren't.
Several states have introduced or discussed
What happens next legislation that would mirror some or all of Il-
Following are three responses coming as a result the rul- linois’ approach. According to industry tracking
ing in favor of the IFPA: by merchant and banking groups, proposals to
restrict interchange on sales tax or tips have sur-
1. The Illinois Bankers Association announced it will faced in states including Arizona, Connecticut,
appeal to the Seventh Circuit Court of Appeals. How- Kansas, Maryland, New York and Texas, in ad-
ever, there's no automatic stay. Meaning, unless the ap- dition to the District of Columbia.
peals court intervenes, the law takes effect July 1, 2026.
2. To make matters more complicated, 22 states have in- Pennsylvania lawmakers have floated a narrow-
troduced or previewed interchange legislation. The Il- er measure focused on the sales tax portion of
linois Retail Merchants Association called this decision transactions, while Washington state has exam-
"a model for other states." Expect copycat bills. ined limits tied specifically to gratuities.
3. Industry groups are urging the Illinois legislature Meanwhile, Florida, Georgia and Tennessee
to repeal the law. The Electronic Payments Coalition
called it a "reckless policy" that will "inflict credit card have explored the issue through legislative com-
mittees or policy discussions aimed at studying
chaos."
the impact of interchange fees on merchants and
What you should do now consumers. Other states, including Colorado,
Massachusetts and New Jersey, have pursued
If you're a payment network: broader payment-fee or card-acceptance reforms
• Stand up implementation teams immediately: you that could influence the same policy debate.
have 4.5 months.
• Begin technical design for split-basis interchange For merchants and consumer advocates, the Il-
linois decision offers a potential template. Sup-
calculation. porters argue that businesses should not pay fees
• Coordinate with acquirers and issuers on the man- on money they merely collect and pass along to
ual submission workflow. governments or employees.
• Monitor the appeal and consider requesting a stay
of implementation. For banks, card networks and payments com-
panies, however, the prospect of a patchwork
• Track legislation in other states, and evaluate of state-by-state rules raises serious operational
whether uniform standards would reduce future concerns, particularly given the technical chang-
compliance costs. es required to separate taxes and gratuities from
the rest of a transaction.
If you're an acquirer or processor:
• Survey your Illinois merchant base: can their POS The stakes—and the disagreements—are likely
systems separately report tax and gratuity? to intensify as Illinois’ July 1 implementation
• Build merchant education programs: many won't deadline approaches.
be ready by July 1. The debate is explored in even sharper terms in a
• Design processes for handling manual merchant forthcoming article by Steven Peisner, vice presi-
submissions (180-day window). dent of sales and marketing at Acquiring Solu-
• Plan for increased merchant support volume tions International and a member of The Green
around the implementation date. Sheet Advisory Board. Keep an eye out for his
byline in our next issue.
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