The Green Sheet Online Edition
April 13, 2026 • 26:04:01
Illinois interchange law: The unanswered operational questions
In my previous article titled "Illinois could learn a hard truth: Card acceptance is not a right," which appeared in The Green Sheet issue 26:03:02, I discussed the broader implications of Illinois' Interchange Fee Prohibition Act (IFPA) and why the payments industry is watching it closely. But after the headlines fade and the legal arguments settle, the real challenge begins where the industry operates: inside the operational layer of the payments ecosystem.
When you move from legal jargon to real transaction processing, the questions become far more complicated than "don't charge interchange on sales tax or gratuity." The reality is that the payments ecosystem was never designed to price transactions that way.
A $10 transaction tells the story
Let's start with a simple example. Take a $10 regulated debit transaction. Under the Durbin-regulated debit schedule, interchange is 5 basis points plus $0.22 per transaction. That means:
- 5 basis points on $10 = $0.005
- Fixed fee = $0.22
- Total interchange = $0.225
Now assume a typical processor pricing model: Interchange + dues & assessments + 10 basis points and $0.10 per item. That adds:
- 10 basis points on $10 = $0.01
- Processor item fee = $0.10
- Total processor markup = $0.11
Before even accounting for network dues and assessments, the cost of the transaction is already approximately: $0.335
What this highlights—something any "feet-on-the-street" salesman already knows—is that small-ticket debit economics are driven primarily by fixed per-transaction fees, not the basis-point percentage. In fact, anyone who has ever looked at a merchant statement from a small-ticket business—a coffee shop, a convenience store, or a quick-service restaurant—knows that the per-item component often drives the economics of the entire relationship.
Now compare that to flat-rate processing
Many small merchants today are not on interchange-plus pricing. They are on payment facilitator pricing models such as those offered by Square or Stripe. Their commonly advertised rate: 2.9 percent plus $0.30 per transaction.
On a $10 purchase:
- 2.9% = $0.29
- Per-transaction fee = $0.30
- Total cost = $0.59
That means the merchant pays 59 cents on a $10 transaction, an effective rate of 5.9 percent. Put another way, the merchant is paying nearly six times the percentage component of Durbin-regulated debit interchange, which is only 0.05 percent. This comparison illustrates a point that is often lost in the public debate: interchange is only one component of a much larger economic structure.
The fixed fee problem
The Illinois statute prohibits interchange on sales tax and gratuity portions of a transaction. But regulated debit interchange includes a fixed $0.22 component (the highest per-item fee in the interchange tables), and processor pricing structures frequently include their own fixed per-item fees layered on top of interchange.
And the law does not explain how those fixed fees should be allocated if only part of a transaction is exempt. So, with that said, the industry is left with several unanswered operational questions the law doesn't take into consideration:
- Is the $0.22 interchange per-item fee prorated between taxable and non-taxable components?
- Does it disappear entirely if any exempt portion exists?
- Who performs the calculation: the merchant POS system, the processor, the network or the issuing bank?
- And at what stage does the calculation occur: authorization, clearing or settlement?
- And to whom is this information reported?
Each of those answers produces a different operational architecture, and none of them is currently reflected in the card network rules or existing settlement processes.
The complexity grows even further when you consider the per-item processor fees that typically accompany interchange-plus pricing. In many merchant pricing models, processors charge a fixed transaction fee—often $0.10, $0.15, or $0.20 per item—in addition to the interchange rate, often referred to as "authorization" and "settlement" fees.
If interchange must now be partially removed from certain portions of a transaction, how exactly is the processor's fixed per-item component treated? Will processor fees be next on the list of Illinois legislators? The statute offers no guidance.
Equally important, no language anywhere in the law restricts how those per-item fees might change in response to the new regulatory environment. If interchange cannot be collected on certain portions of a transaction, processors and networks still incur the same operational costs associated with authorizing, routing, clearing, settling, funding and securing the transaction.
Those costs do not disappear simply because one component of the pricing structure has been prohibited.
If anything, costs will likely increase due to additional operational complexity. In practical terms, the most likely outcome is straightforward: the fixed per-item component of processing fees will be adjusted elsewhere in the pricing model. The law addresses interchange, but it does not limit the ability of networks or processors to modify other pricing categories or add a fee, for example: IFPA fee of $0.01.
And if legislators think CVS receipts are long today, imagine what happens when every transaction must separately identify the purchase amount, the sales tax component, the gratuity component, the portion of each subject to interchange, and the portion exempt under state law. The payments system was built to move money in milliseconds, not to perform forensic tax accounting on every transaction.
And when you start adding additional reconciliation layers on top of a system designed for speed and efficiency, the operational complexity grows quickly.
As for how the pricing side of the equation ultimately evolves, the statute itself may provide a clue, not in what it says, but in what it doesn't say. No provision prevents adjustments to fixed transaction fees or other pricing components. In the payments industry, when one revenue component is restricted, others tend to move to compensate. As the old saying goes, "the writing is already on the wall."
Six months versus six years
The law is currently scheduled to take effect in July 2026. From an engineering standpoint, that timeline raises serious concerns and, in my opinion, is utterly ridiculous. As mentioned in my first article of this series, the industry has already seen what large-scale regulatory implementation looks like.
When the 1099-K reporting requirement was introduced, it took years of development, testing, certification and coordination between processors, networks, acquirers and software providers. Merchant service providers collectively spent millions of dollars building those reporting systems, and that was a reporting-only function.
Implementing the Illinois law would require significant changes to:
- Authorization messaging formats
- Settlement logic
- Tax allocation frameworks
- Processor billing systems
- Merchant reporting infrastructure
- Network operating rules
Even under ideal conditions, a realistic implementation timeline could approach several years. For readers that have been here for a while, just think about 3-D Secure. And that estimate assumes we are solving the problem for one state only. As the saying goes: Rome wasn't built in a day. It certainly wasn't built in six months.
What if other states follow?
Illinois may only be the beginning. Similar interchange legislation has already been introduced in several other states. If each state begins implementing different rules tied to tax treatment, the payments ecosystem could face a regulatory patchwork across thousands of jurisdictions.
The United States currently has nearly 14,000 sales tax jurisdictions. Trying to apply transaction-level pricing rules tied to tax calculations across that many jurisdictions would introduce an extraordinary level of complexity into a system designed to operate on consistent national standards.
Understanding the network structure
The legal arguments surrounding the Illinois statute have also highlighted an ongoing misunderstanding of how payment networks operate. Visa and Mastercard are often viewed as card companies. In reality, they are global payment networks.
The card networks do not issue cards themselves, and contrary to popular belief, they do not process or authorize transactions (except in limited contingency situations). Instead, they provide the infrastructure and operating rules that connect approximately 14,500 issuing financial institutions and roughly 1,300 acquiring banks worldwide.
A useful way to understand this structure is to think of the payment card networks as a system of global railroad tracks reaching nearly every corner of the world. The networks themselves are the tracks, while the member institutions—banks, credit unions, and fintech issuers such as JPMorgan Chase, Citigroup, Bank of America, and Capital One—are the cars that ride on those tracks.
These institutions issue cards, extend credit to consumers, and assume the financial risk associated with each transaction moving across the network.
The system functions because the tracks are uniform everywhere, and the cars are designed to operate under a consistent set of rules. If a single jurisdiction requires the tracks within its borders to be built differently—or mandates different operating rules for the cars—the trains that run everywhere else in the world cannot simply adjust for that one segment of track.
At that point, the system faces only two practical choices: redesign the entire network to accommodate one jurisdiction or stop running trains through that section of track altogether. The networks simply provide the rails that the trains run on. Understanding that structure is essential when evaluating how state-level mandates interact with a global payments system.
The economics don't disappear
Whether the Illinois law ultimately survives legal challenges, and many observers (including me) believe the issue could eventually reach the U.S. Supreme Court, one economic reality remains constant: The cost of running the payments infrastructure does not disappear.
If interchange is restricted in one area, those costs will inevitably move somewhere else. Networks can adjust dues and assessments. Processors can adjust their markup structures. Merchants will see those changes in their statements. And ultimately, consumers will see them in prices.
The question the industry is asking
The debate around the Illinois law has largely focused on the fairness of interchange. But for those who live in that world, the people who manage and operate the payments infrastructure, the question is simple: Can a payment system built to operate on consistent global standards realistically support transaction-level pricing mandates tied to thousands of different tax jurisdictions?
That question has not yet been answered. But the payments industry will soon find out.
What the industry should be watching next
For ISOs, acquirers, processors and software providers, the Illinois law is not just a policy debate; it is a potential systems architecture nightmare. If the law ultimately survives legal challenges, the industry will be forced to answer questions that have never previously existed in card processing.
Transaction messages may need to distinguish between taxable and non-taxable components in ways they were never designed to support. Processor billing systems may need to allocate fixed fees across different transaction elements. Merchant reporting platforms may need to provide entirely new reconciliation fields.
And if Illinois becomes the first state to successfully implement this model, the likelihood of copycat legislation increases dramatically with New York and California leading the charge. At that point, the debate moves well beyond interchange. It becomes a question about whether a payment system designed around consistent national standards can realistically support state-by-state transaction pricing mandates.
In the meantime, processors, acquirers and ISVs will likely begin evaluating what system changes might be required if the law remains in place. Networks will continue assessing how existing operating rules intersect with state-level mandates. And legal challenges will almost certainly continue working their way through the courts, potentially for years.
For now, one thing is clear: The Illinois law has already accomplished something significant. It has forced the payments industry to confront a question that has rarely been asked before: What happens when state legislation attempts to rewrite the economics of a national payments infrastructure? The answer may take years to unfold.
But long before the courts issue a final ruling, processors, acquirers, networks and software providers will have to determine something far more immediate: whether the existing payments infrastructure can realistically support the operational requirements the law appears to demand? For a payments ecosystem built on uniform rules and global interoperability, that is not a small question. If it cannot, the industry may face a difficult choice: redesigning core payment systems for one jurisdiction, reconsidering how those transactions are supported altogether, or realizing that rebuilding a global payments infrastructure for a single state may not be the smartest engineering decision anyone has ever made.
In the end, the entire debate begins to resemble a classic sales scenario. When negotiations stall, sales professionals are often taught to use what is known as the "take-away close": remove the product from the table and see how the customer reacts. One must wonder how the conversation might change if every business owner in Illinois opened their mail one morning to find a letter resembling the sample letter that follows:
April 15, 2026 Illinois Merchant 123 Main Street Anywhere, IL 99999
Subject: Notice Regarding Card Acceptance in Illinois
Dear Valued Merchant,
This notice is to inform you of a regulatory development affecting the acceptance of Credit/Debit/EBT/Gift cards within the State of Illinois.
On February 10, 2026, Chief Judge Virginia Kendall upheld key provisions of the Illinois Interchange Fee Prohibition Act ("IFPA"), which prohibits banks and credit unions from collecting interchange fees on the sales tax and gratuity components of card transactions.
Interchange is a mandatory element of every card transaction and is governed by the operating rules of the card networks and issuing financial institutions. The IFPA creates a direct conflict between Illinois law and the network rules and settlement processes that enable electronic card payments.
Because compliance with both frameworks is not technically or contractually feasible, payment processors, issuing banks, and card networks cannot continue supporting card acceptance in Illinois under the current operating model.
Accordingly, effective July 1, 2026, merchant accounts used to accept credit, debit, prepaid, and EBT card transactions conducted within the State of Illinois will be discontinued. This includes transactions processed through the networks operated by Visa, Mastercard, American Express, and Discover Financial Services. Merchants should begin preparing for this transition by implementing alternative forms of payment acceptance, including cash, checks, and digital payment platforms such as Venmo, Cash App, and Zelle, and by updating internal point-of-sale, billing, and accounting procedures as appropriate.
This action is not related to your business profile, processing history, or risk status. It is solely the result of the legal and operational conflict created by the IFPA.
If you have concerns regarding the impact of this law on your business or your customers' ability to pay, you may wish to contact your elected representatives in the Illinois General Assembly to share your perspective as a local business owner.
Additional information regarding account closure procedures and equipment handling will be provided separately.
We will continue to monitor legal and regulatory developments and will notify merchants if a viable framework for reinstating card acceptance in Illinois becomes available.
Sincerely,
David Hunter President Your Merchant Services Provider [End sample letter]
In any event, the rest of the industry will be watching very closely. And if the day ever comes when letters like the one above are sent out, the debate about interchange will likely end very quickly. 
Green Sheet Advisory Board member Steven Peisner is vice president sales and marketing for Acquiring Solutions International Inc. | Global Payment Solutions (https://www.aqsi.com). Contact him via email at speisner@aqsi.com.
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