A Showdown Looms as Bank Groups Move to Block Legislation Aimed at Reducing Card Interchange Fees

Credit cards are such a common payment instrument in today’s world that cardholders may not spend much time thinking about what goes on behind the scenes when they swipe their card to complete a transaction. And that’s part of a credit card’s appeal — you don’t have to think too much when you use one.

Credit cards allow users to skip the anxiety that can accompany filling out a paper check while shoppers in line behind you roll their eyes at your antiquated payment preferences. There’s no fumbling through your purse for loose change to complete a transaction when you’re using your card either. You simply swipe, sign, and you’re on your way. 

The convenience of credit card transactions is made possible in part by interchange fees, which set aside a small portion of the cost of a purchase for the credit card issuer. But interchange fees are at risk, thanks to the Illinois Interchange Fee Prohibition Act (IFPA).

The act, set to take effect on July 1, 2025, seeks to exclude the sales tax and gratuity portions of a credit or debit card transaction from interchange charges. But banking groups, including the American Bankers Association, America’s Credit Unions, and the Illinois Bankers Association, are asking an Illinois court to block the law before it goes into effect.

“The Illinois Interchange Fee Prohibition Act (“IFPA”) threatens to upend the nationally integrated card payment system by imposing drastic restrictions and draconian penalties on its participants,” the plaintiffs said in a case document outlining their stance.

“Its Interchange Fee Prohibition would force Issuers to forgo a portion of the revenue that compensates them for taking on credit risk, monitoring for fraud, providing benefits to cardholders, and otherwise greasing the wheels of the state and national economy,” the plaintiffs continued.  

A hearing on the motion is set for April 16.

Though the Interchange Fee Prohibition Act originated in Illinois, stakeholders across the country will be keeping a close eye on developments related to the act. Lawmakers from other states, including Maryland and Washington, have also proposed legislation to eliminate interchange fees on taxes and tips.

We caught up with Phillip Parker, Founder of CardPaymentOptions.com, to hear his perspective on the battle over interchange and how laws such as the IFPA, if implemented, may affect issuers and merchants. 

Parker told us that the laws to restrict interchange on taxes present a challenge because card-acceptance technology isn’t set up to extract interchange fees from sales tax. 

Software-based point-of-sale systems can be modified via software updates, but millions of businesses use standard card terminals that either can’t be updated via software patches or require manual updates, he said. That means that laws such as the IFPA may create a burden on merchants that will add costs to their operations.

And businesses that use terminals that can meet the demands of the IFPA aren’t in the clear.

“For the machines that can be updated, it will likely require businesses to add an additional step to their checkout process for manually entering the sales tax amount, in addition to the sale amount for each transaction,” Parker said.

“Not only is this a new headache for businesses, but it raises concerns about who is on the hook for compliance — the business or the processor.”

The Interchange Fee Prohibition Act stands to impact merchants that operate in Illinois, but could have broader implications if the act isn’t blocked. We checked in with Ben Walker, CEO of online transcription company Ditto Transcripts, to hear his take on the act and any issues he envisions it causing for businesses. 

“We process a lot of payments with credits and would definitely like to see fewer processing fees,” Walker told us. “But having to adjust our system for only the state of Illinois while keeping it the same for other states would be a bit challenging until the online payment platforms we use catch up.”

Credit card issuers stand to lose interchange revenue if the IFPA and similar efforts in other states go into effect.

Revenue reductions may cause issuers to slash expenses to maintain profits, which means that popular card benefits could be on the chopping block if interchange can’t be collected on the total cost of a bill.

“Banks may reduce incentives tied to rewards and miles programs to make up for the lost revenues that were previously generated by interchange fees tied to taxes and tips,” Parker said. “With the standard tip running at around 20% of the total bill and sales tax averaging around 5%, this could have a measurable impact on processing banks’ bottom lines.”