SPRINGFIELD, Ill. – In a significant legal ruling, a federal judge on Thursday refrained from halting an Illinois law designed to limit certain charges by credit card companies, which is set to alter transaction fee structures statewide. These companies typically impose “swipe fees” on merchants for processing credit and debit card payments.
Last spring, the Illinois Legislature enacted the Interchange Fee Prohibition Act, a pioneering law that prohibits these fees on the taxation and gratuity portions of credit and debit card transactions, effective from July 1. This legislative move, part of the state’s budget resolution, still permits fees on the base price of goods and services.
Banking sectors, foreseeing complications, filed a legal challenge in August, arguing the state law contradicts federal regulations governing financial institutions. They contended the law mandates the implementation of advanced, and potentially expensive, computing systems to separately account for goods, taxes, and tips within transactions.
Proponents of the law, including the state’s major retail association, maintained that adapting to the new rules would be straightforward, citing existing regulations that already limit interchange fees for specific purchases.
Further clarification came from U.S. District Judge Virginia Kendall of the Northern District of Illinois, who in December granted a preliminary injunction that prohibited the law’s application to federally chartered banks. However, in an extension of her initial ruling, Judge Kendall decided not to extend this injunction to cover credit unions and state-chartered banks, though she did continue it for out-of-state banks operating within Illinois.
This partial granting reflects a broader legal interpretation that federal laws govern out-of-state banks, which cannot be overridden by this state statute. Although the injunctions are temporary, pending a comprehensive judicial review, they highlight the complexities of aligning state-imposed financial regulations with existing federal frameworks.
Rob Karr, CEO of the Illinois Retail Merchants Association, lauded the decision, expressing optimism that it would mitigate the financial burden on businesses and consumers caused by opaque fee structures. According to him, this regulation would curtail excessive swipe fees on the enumerative portions of transactions, fostering economic relief.
The impetus for the law came during budgetary talks last spring, when state officials, responding to pressure from retailers represented by IRMA, sought to fill a budget shortfall by capping a monthly sales tax deduction for retailers at $1,000, forecasted to generate about $101 million.
In a trade-off, the legislature agreed to the prohibition on swipe fees at IRMA’s urging. This legislation forms part of a broader effort to manage financial transactions more equitably across various sectors.
However, leaders from major banking associations announced their intent to persist in opposing the law. Ben Jackson of the Illinois Bankers Association, along with Ashley Sharp of the Illinois Credit Union League, criticized the law as fundamentally flawed and disruptive to the Illinois payment system. They vowed continued efforts to protect consumers, businesses, and financial institutions from the repercussions of this law.
This ongoing legal dispute is scheduled for another review on March 6 in Chicago, as stakeholders across the financial and retail sectors closely monitor developments.
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