MAG Insights

Illinois Kicked Things Off

In June of 2024, the governor of Illinois signed the Illinois Interchange Fee Prohibition Act (IFPA) into law, which prohibits financial institutions, card networks or processors from charging or receiving interchange fees on the portions of card transactions that are attributable to sales tax, other local taxes, and gratuities (tips)  . The law’s effective date was recently delayed by one year to July 1, 2026  . In addition to this legislation becoming law, 13 other states have similar legislation pending in their legislatures.  

The IFPA Legal Challenge

Soon after Governor Pritzker signed the IFPA, a coalition of the American Bankers Association (ABA), the Illinois Bankers Association (IBA), America’s Credit Unions (ACU), and the Illinois Credit Union League (ICUL) filed a lawsuit challenging the law. Their lawsuit centered around a core argument that federal law, specifically the National Bank Act (NBA) and the Federal Credit Union Act, preempted this state law. Legally speaking, preemption means that existing federal law overrides state laws.  Here, the bank plaintiffs argued that the state law substantially interfered with the “business of banking” contrary to federal law.  

On December 20, 2024, Chief Judge Kendall, the federal judge   overseeing the case, issued a preliminary injunction, which temporarily halts enforcement of the law until a final decision is made, that applies to national banks and federal savings associations. Federal credit unions, Illinois chartered banks and credit unions, and—importantly, the card networks or processors were not included in the injunction. On February 7, 2025, the judge extended the injunction to include out-of-state chartered banks operating in Illinois.

In granting the preliminary injunction, the judge concluded that the IFPA was likely preempted as to national banks and federal savings associations.  This rationale was extended to out of state banks, due to federal laws that bar states from discriminating against out-of-state banks.  The bank plaintiffs listed above have filed for summary judgment seeking to make the preliminary injunction a permanent injunction against the IFPA. 

The MAG is closely monitoring this case and any subsequent decisions.  At its core, the case in Illinois concerns how much authority states have to regulate interchange, the vast bulk of which is charged/received by national banks.

How are other states reacting?

As of this article’s publication, 13 other states have pursued similar legislation to the IFPA. While many of these bills are similar, others go further than addressing interchange fees on tax and tips, and others attempt to address the concerns identified by the federal court in Illinois by focusing on the activity of non-banks such as card networks and processors. Below is a breakdown of each state.

Most states follow the IFPA’s focus on tax and tip-related interchange, but there are key variations. Some states differ in how they define taxable items based on their own sales and use tax rules. Others narrow the scope, like Pennsylvania, which only targets interchange on taxes, or Washington, which focuses solely on tips.

The proposed bill in Colorado is the most robust. On top of restricting interchange charges on tax and tips, the bill also limits interchange rates on charitable donations, restricts potential collusion around interchange fee setting, and also addresses the long-standing Honor All Cards   rule, which requires merchants to accept all cards from a particular network or issuer if they accept any.

All of these bills have been drafted within the last 24 months and are at various stages of the legislative process. While minor differences exist, the chart below categorizes each bill depending on its progress through the state legislature.

What Should Merchants Do?

There is positive movement  in the interchange reform debate in many states.  All of the bills make clear that merchants do not have to do anything—compliance on the part of merchants is voluntary, although merchants may affirmatively want to comply to obtain the benefit of the laws by lowering the interchange fees they pay.

Merchants operating in Illinois should check in with their acquirers to get a sense of their readiness. Although merchants have no requirements to make changes under the IFPA, if they would like to remove interchange from sales tax, there may be work to their backend systems or software that they will need to coordinate with their service providers and acquirers. The MAG is monitoring activity in other states and provides updates during the monthly MAG Advocacy and Communications Committee meetings and engaging with your state’s elected officials will help bring awareness to this issue.