Banks appeal ruling that upheld Illinois swipe fee ban

• Key Insight: The battle over Illinois' ban on certain "swipe" fees is not over, as a coalition of banking trade groups appeals the latest court ruling.
• Expert Quote: "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," wrote the American Bankers Association and its co-plaintiffs.
• Forward Look: The fate of the appeal is now up to the U.S. Court of Appeals for the 7th Circuit.

In the latest battle over an Illinois law that bans certain "swipe" fees, lenders have appealed a court ruling that largely left the law standing.

That law, the Illinois Interchange Fee Prohibition Act, prohibits interchange fees on the tax or tip portion of any credit or debit card purchase in the state. A coalition of trade groups for banks and credit unions sued to block the legislation from taking effect, arguing that it contradicted federal law.

On Feb. 10, U.S. District Judge Virginia Kendall delivered a split ruling, blocking the part of the law that pertained to data usage but upholding the part that applied to fees. Three days later, the plaintiffs — the American Bankers Association, the Illinois Bankers Association, America's Credit Unions and the Illinois Credit Union League — filed a notice of appeal.

"The appeal seeks a declaratory judgment that the IFPA is contrary to federal law, as well as an injunction prohibiting state officials from applying or enforcing it," America's Credit Unions said in a statement.

The IFPA, passed in 2024 by Illinois' Democrat-dominated state legislature, is set to take effect in July this year. If allowed to stand, it will bar financial institutions, processors and card networks in the state from charging or receiving swipe fees on the sales tax, excise tax and tip portions of card transactions.

In her Feb. 10 ruling, Judge Kendall, who sits in the Northern District of Illinois, wrote that the IFPA did not directly clash with federal law on this point, because it's the credit card companies, not banks, that charge the interchange fees.

"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."

Shortly after the ruling, the plaintiffs issued a joint statement vowing to continue their fight and calling on state legislators to repeal the law.

"We are deeply disappointed by today's ruling," the groups said. "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. We cannot let that stand."

Retailers, meanwhile, not only hailed the court's decision but also hoped laws like the IFPA would proliferate.

"Today's ruling is a historic win for Main Street over Wall Street and will save businesses and consumers millions of dollars a year," Rob Karr, president of the Illinois Retail Merchants Association, said in a statement on Feb. 10. "As the first law in the nation to restrict onerous swipe fees, we hope this measure can serve as a model for other states to seek relief for businesses and working families struggling with higher costs."

Others in the banking world saw trouble ahead. Jaret Seiberg, an analyst for TD Cowen, echoed the plaintiffs' warning of "chaos" to come.

"We believe the Illinois law is unworkable and could disrupt the ability of most banks to process credit and debit transactions in the state," Seiberg wrote in a note following the court's ruling. "There is no way currently for data on taxes and tips to be transmitted along with the payment. And it will be challenging for banks to retroactively assess the accuracy of refund requests from merchants."

The case is now in the hands of the U.S. Court of Appeals for the 7th Circuit. As the trade groups appeal, Seiberg predicted that they would win an emergency stay of the IFPA's ban on swipe fees.

"The law is set to take effect on July 1," Seiberg wrote. "We do not expect that to happen."