A federal judge on Tuesday upheld an Illinois law that bans interchange fees on the sales tax and gratuity portions of card transactions.
The Interchange Fee Prohibition Act presented “a close case” because the law is novel, wrote District Judge Virginia Kendall of the Northern District of Illinois in Chicago. “What truly makes this case complicated is that the IFPA— specifically the Interchange Fee Provision—does not directly regulate banks.”
The law, which is set to take effect on July 1, has inspired similar legislation in more than a dozen other states where legislators have sought to rein in card-swipe fees. Restaurant and retail groups promoted the Illinois law as their members sought ways to curb the fees they pay when a consumer pays with a card.
Kendall had previously issued a preliminary injunction, blocking the law for many of the affected parties, ahead of further litigation on the case.
In her ruling on plaintiffs’ request for a permanent injunction, Kendall wrote that a card swipe begins an electronic “elaborate dance” to complete a card transaction. That payment process is quick, but not free, and card networks set the fee schedules, she noted.
“The banks are undoubtedly necessary to the transaction — which, without the banks, could not take place at all — and the interchange fees ostensibly compensate those operations,” Kendall wrote. “But the banks do not set those fees.”
That scenario, in which card networks such as Visa and Mastercard determine interchange rates, represents “the core snag” in the plaintiffs’ argument that the National Bank Act preempts the Illinois law, Kendall wrote.
“The Payment Card Networks built this ecosystem, and the Payment Card Networks set these fees,” she wrote.
“The judge has seen clearly that it’s Visa and Mastercard that run the swipe-fee system and that states can regulate these anti-competitive fees,” Doug Kantor, an executive committee member of the Merchants Payments Coalition, said Tuesday in a statement.
Four trade associations for banks and credit unions sued Illinois in August 2024 over the law, the first state legislation of its kind.
The American Bankers Association, Illinois Bankers Association, America’s Credit Unions and Illinois Credit Union League said in a joint statement Tuesday they were “deeply disappointed” and will appeal Kendall’s ruling.
“The decision not to protect the payment system from this misguided state law is a serious error that will unleash chaos and confusion on Illinois consumers and businesses,” the groups said, urging Illinois lawmakers “to repeal this flawed law.”
In her ruling, Kendall also struck down a separate part of the law, which limited the use of transaction data by banks, networks and other entities.
Jodie Kelley, CEO of the Electronic Transactions Association, said in an interview Wednesday that Kendall’s ruling, if it stands, opens the door for a “patchwork” of state laws that would disrupt the payments ecosystem. She said the association, which represents a variety of payments players, including banks and card networks, is confident that the 7th U.S. Circuit Court of Appeals will overturn the decision.
“Massive changes would need to be made and that just adds expense and complications,” Kelley said. “If the system can’t handle charging different components of a transaction in different ways ... you could see that tips have to be in cash or sales tax have to be in cash. Or you have to run two transactions to differentiate.”
The decision was celebrated by Illinois merchants, many of whom have battled card swipe fees for years and viewed the law as a model for other states.
The ruling “is a historic win for Main Street over Wall Street and will save businesses and consumers millions of dollars a year,” Rob Karr, CEO of the Illinois Retail Merchants Association, said Tuesday in an emailed statement. “We hope this measure can serve as a model for other states to seek relief for businesses and working families struggling with higher costs.”
In December 2024, Kendall offered a preliminary injunction against the law for national banks, federal savings institutions and out-of-state state banks. She denied that request for federal credit unions, card networks, debit card transactions and out-of-state state financial institutions.
The law calls for a $1,000 penalty per electronic payment transaction for violations, plus a refund of fees collected erroneously. Card networks aren’t liable for merchant reporting mistakes under the law.
Last June, Illinois lawmakers voted to delay the law by one year, to July 1, 2026.
