With Illinois Interchange Ban Under Injunction, Banks and Merchants Await Next Move

A battle in Illinois over interchange fees could influence other states to decide whether these fees should be reshaped or banned.

Banks charge each other interchange fees to cover the processing costs of credit and debit card payments. When a consumer buys goods or services with a card, the merchant gets the remaining amount of the transaction excluding the interchange fees.

Illinois’ Interchange Fee Prohibition Act was signed into law in June and was slated to come into effect in July, but a federal judge ordered a preliminary injunction of the law in December.

The Illinois House of Representatives introduced a bill Tuesday (Jan. 28) with just a few lines of text, including: “The Interchange Fee Prohibition Act is repealed.” Should the bill make it through the state chambers and be signed by the governor, the repeal would become “effective immediately.”

The path toward what happens next will be paved through legislation and/or the courts, and although the prohibition has not become a reality, it’s worth noting what would happen. In broad strokes, banks would be prohibited from charging interchange fees on a slice of credit and debit transactions, specifically the state and local tips and taxes levied on goods and services.

“An issuer, a payment card network, an acquirer bank or a processor may not receive or charge a merchant any interchange fee on the tax amount or gratuity of an electronic payment transaction if the merchant informs the acquirer bank or its designee of the tax or gratuity amount as part of the authorization or settlement process for the electronic payment transaction,” the act stated.

What’s Prohibited

In addition, the act said it would be “unlawful for an issuer, a payment card network, an acquirer bank or a processor to alter or manipulate the computation and imposition of interchange fees by increasing the rate or amount of the fees applicable to or imposed upon the portion of a credit or debit card transaction not attributable to taxes or other fees charged to the retailer.”

The injunction that came last month is a partial one, as it restricts the fees for Illinois chartered financial institutions and payments networks (including Visa and Mastercard) but does not apply to national banks. Banks argued that the prohibition would “upend the intricate and carefully calibrated global systems for debit and credit card purchases.”

U.S. Sen. Dick Durbin of Illinois is a supporter of the state-level prohibition efforts and filed an amicus brief in support of the law in October. Durbin is the driving force behind the Credit Card Competition Act of 2023, which supporters say would drive interchange fees down by allowing merchants to choose networks over which card transactions would be routed.

As for the economic impact, research documented in “The Impact of the U.S. Debit Card Interchange Fee Caps on Consumer Welfare: An Event Study Analysis” by economist David Evans indicated that “consumers lost more on the bank side than they gained on the merchant side” by as much as $25 billion in discounted value dollars as a result of the interchange fee cap initially set in place by the Durbin Amendment.

Illinois is the only state that has passed a bill to prohibit and reshape how interchange fees are charged, and on which parts of the transaction itself. However, similar efforts have been seen in other states like Pennsylvania. Past legislative sessions in Georgia have sought to study the impact of fees.

What happens in Illinois may prove instructive to several states and whether they move forward with their own efforts to curb interchange fees.