Illinois Credit Card Swipe Fee Law Sparks Legal Fight With Banks

Illinois is the first state to bar credit card companies such as Visa Inc. and Mastercard Inc. from charging swipe fees on retail tips and taxes, but implementation hurdles and likely litigation from banks means it may also be the last.

The Interchange Fee Prohibition Act was included in the Illinois omnibus budget bill (HB 4951) and signed into law by Gov. JB Pritzker (D) on June 7. Beginning in July 2025, credit card issuers won’t be able to collect interchange fees on sales and excise taxes and gratuities if a merchant elects to separate out those charges from the price of a purchase.

The law comes amid a decades-long fight pitting retailers like Walmart Inc., Target Corp., and Amazon.com Inc. against banks over interchange fees that credit card issuers charge to process transactions. Credit card swipe fees imposed by Visa and Mastercard alone topped $100 billion in 2023, according to the Merchants Payments Coalition.

Credit card companies and retailers had reached a $30 billion deal this year to cap credit card swipe fees, but a federal judge in Brooklyn rejected the settlement in June, arguing Visa and Mastercard could handle a bigger amount.

Legislation to cap credit card interchange fees has stalled in Congress, pushing much of the action to the state level. Retailers hope the new Illinois law will become a model for other states, such as Pennsylvania and Georgia, that are considering similar measures.

But the Illinois law doesn’t include many details on how to implement it, making a complex undertaking that much more difficult. And vehement opposition from banks and credit card companies, including anticipated legal challenges in the coming months, may keep other states on the sidelines for now.

“This is going to be complicated to implement, and I think that’s not usually a benefit to consumers,” said Vaishali Rao, a partner at Hinshaw & Culbertson LLP in Chicago who advises financial institutions. “I just don’t really know that other states are going to want to go through with this.”

First Mover

That Illinois was the first state to exempt taxes and tips from interchange fees is hardly a surprise.

The state’s senior senator, Dick Durbin (D), led the fight to cap interchange fees on debit card transactions in the 2010 Dodd-Frank Act. And he’s the co-author of the Credit Card Competition Act (S. 1838), which would cap the fees for credit card payments.

Durbin’s pending bill has stalled, but he applauded his home state for acting.

Backers of the state legislation say it will save merchants money and that those savings will be passed along to consumers.

“We support it because it helps retailers control costs on the moneys they’re collecting on behalf of state and local governments and tipped employees,” said Rob Karr, the president and CEO of the Illinois Retail Merchants Association.

Karr’s group helped negotiate the interchange fee law with Pritzker and Democrats in the Illinois legislature to offset limits on a tax refund for merchants in the state budget.

Banks and the broader credit card industry counter that it’s mostly giant retailers that have benefited from the cap on interchange fees without passing those savings on to customers.

Debit card issuers subject to interchange caps stopped offering rewards points when the limits came into place, said Richard Hunt, the executive chairman of the Electronic Payments Coalition, a trade group with members including big banks, credit unions, fintechs, and card network giants Visa and Mastercard.

The Illinois law doesn’t pose a broad risk to rewards, but it does have the potential to sow confusion, Hunt said.

Issuers would have to set up specific rules for Illinois, and in some instances consumers may have to either cover taxes and tips with a second swipe of their credit card or with cash, Hunt said. Different products and services are taxed at different rates, adding another layer of confusion, he said.

“This will create credit card chaos like we’ve never seen before,” Hunt said.

Those concerns are overblown, Karr said.

Credit card issuers already navigate different tax schemes around the country, Karr said, adding that Illinois merchants won’t have to participate in the new system unless they opt in.

“At the end of the day, the law is optional for merchants,” he said. “If they prefer the current system, they can work it out with their processor to keep the current system.”

No Roadmap

Merchants concede there will be some growing pains as they and credit card companies figure out the new environment.

There are also likely to be new upfront costs for merchants that have to update their point-of-sale technology, said Daniel D. Clausner, the executive director of the Illinois Licensed Beverage Association, which represents restaurants and taverns around the state.

“This country can do amazing things, and I believe that putting a program together to take out the fees on taxes and tips is something that we’ll be able to come up with,” Clausner said.

The law itself, however, doesn’t provide much clarity on how to get that done.

“One of the things that might be concerning to financial institutions is it seems like it’s landed in their laps to find the solution,” Rao from Hinshaw & Culbertson said.

The Illinois law calls for a $1,000 civil penalty for every transaction that doesn’t comply with the statute, but those penalties only apply to payment processors and banks.

“There are punishments set forth in the legislation for the payments industry participants, but there’s nothing there with regard to merchants filing inaccurate statements about the tax or gratuity portion of the transaction,” said Howard Herndon, a Womble Bond Dickinson LLP senior counsel who focuses on the electronic transaction industry.

Beyond the implementation problems, the threat of litigation from banks hangs over the new Illinois law.

“All options are on the table and we hope this never goes into effect,” the EPC’s Hunt said.

Unique Circumstances

Several other states are considering legislation to at least consider curbing credit card interchange fees, using the Illinois law as a base.

Georgia and Tennessee passed bills this year to study the issue. Florida legislators did the same, but Gov. Ron DeSantis (R) vetoed it.

Pennsylvania lawmakers tabled a bill this year that would’ve prohibited credit card swipe fees on sales taxes, with merchants hoping it will get a hearing in the next legislative session.

Banks and the credit card networks say any proposals similar to the Illinois ban are unlikely to gain traction.

“There is a reason every other state to have looked at this issue has rejected passing a law like this one,” said Jodie Kelley, the CEO of the Electronic Transactions Association. “It is harmful to consumers and to small businesses who rely on the payments industry to grow their business.”

In addition, the Illinois measure was enacted as part of a one-time budget deal, under circumstances that are unlikely to be replicated in other states.

In a bid to raise revenue, Illinois state lawmakers placed a $1,000 monthly cap on a tax refund retailers can claim. Retailers were unhappy and negotiated the new interchange law into the budget.

Pritzker’s office referred all questions on the law and its future to the Illinois Retail Merchants Association.

“This was an Illinois problem and there needed to be a fix for it,” Rao said.