Financial institutions filed a long-promised legal challenge Thursday to a new state law that would prohibit them from charging fees on the tip and tax portions of debit or credit card transactions.
An “interchange fee” is a standard charge applied over 150 billion times annually across the U.S. when a credit or debit card is swiped. While it usually applies to a full purchase price, the Illinois law would exempt the portion that goes to tips and state and local taxes.
No other state has enacted such a limitation on interchange fees.
The provision – dubbed the Interchange Fee Prohibition Act – was included in the budgeting process to appease the state’s retailers, because the governor and Democratic lawmakers capped an existing tax discount claimed by retailers to fill a budget gap.
But the move drew swift backlash from financial industry advocacy groups. The Illinois Bankers Association, American Bankers Association, America’s Credit Unions and the Illinois Credit Union League filed a joint lawsuit after weeks of public advocacy against the change.
The change is not slated to take effect until July 1, 2025. The plaintiffs argue it would “upend the intricate and carefully calibrated global systems for debit and credit card purchases.” Specifically, they say the state action “usurps the federal government’s sole regulatory authority” of certain banks and credit unions.
The lawsuit also argues the fees are necessary for the financial institutions to offset risks such as the purchaser defaulting or the purchase being fraudulent.
Institutions “do not have the capabilities, systems, or processes to comply” with the law by July 1, the lawsuit argues, and they’d have to invest “potentially hundreds of millions of dollars” depending on the institution to put systems in place.
The lawsuit asked the courts to prevent the law from taking effect on July 1 and declare it invalid.
Proponents of the IFPA say it should be easily implemented because institutions are already prohibited from charging fees on purchases made through government programs such as the Supplemental Nutrition Assistance Program, and the tax and tip portion of charges is already separated in financial systems.