- Key insight: A federal judge rejected the banking industry's argument that the state law is preempted by the federal National Bank Act.
- What's at stake: The ruling found that swipe fees are set centrally by Visa and Mastercard, rather than by individual banks, thus undermining the banks' argument for federal preemption.
- Forward look: Though the law is scheduled to take effect on July 1, banks are expected to appeal the decision and seek an emergency stay, arguing that there is no current system that exists to separate taxes and tips.
A federal judge has upheld a novel Illinois law that prevents banks and card networks from collecting swipe fees on sales taxes and tips, dealing a major blow to the banking industry's claims of federal preemption.
U.S. District Judge Virginia Kendall ruled Tuesday that a landmark law passed last year by the Illinois legislature and signed by Gov. J.B. Pritzker, a Democrat, does not directly regulate banks. The National Bank Act does not preempt Illinois law, Kendall found, because banks do not directly charge interchange, or swipe fees, but rather receive fees that are set by card networks.
"This is a close case," Kendall wrote. "That is true in part because the law it addresses is novel. The Parties have indicated that no other State has an equivalent to the [
The law bans financial institutions, processors, and card networks from charging or receiving interchange fees on the sales tax and tip portions of credit and debit card transactions.
Merchants argued that it is unfair for them to pay swipe fees on taxes and tips, which get passed on to the state and employees, but they pay interchange fees are on the full amount of the transaction.
"This is a major victory for merchants, their customers and their employees," said Doug Kantor, general counsel of the National Association of Convenience Stores and a member of the executive committee of the Merchants Payments Coalition, two industry trade groups.
Kantor said it's unfair to punish retailers by charging them swipe fees when they are passing the costs on to others. "The fees drive up prices for consumers at a time when affordability is the key issue facing our nation's economy," he said.
The ruling comes within the backdrop of banks and credit card issuers facing scrutiny for using revenue from swipe fees to fund rewards programs. Swipe fees of 1% to 3% per transaction are a major revenue source for issuing banks, helping them cover the risks and costs of processing payments. But critics argue that the fees are funding rewards programs used primarily by wealthier borrowers at the expense of lower-income consumers.
The Illinois law goes into July 1. It applies to credit, debit, and prepaid card transactions processed within the Prairie State.
Banks are expected to appeal and likely seek an emergency stay from the U.S. Court of Appeals for the 7th Circuit to keep the law from going into effect.
Jaret Seiberg, managing director at TD Cowen, said that while he expects banks to eventually prevail in their litigation, the ruling could trigger a congressional response to interchange pricing.
"We view this law as unworkable and could disrupt the ability of most banks to process credit and debit transactions in the state," Seiberg wrote in a research note.
In 2024, the Illinois Bankers Association sued Illinois Attorney General Kwame Raoul challenging the
Richard Hunt, executive chairman of the Electronic Payments Coalition, called on the state legislature to repeal the law. Currently, no system exists to create a carve-out for separate portions of a consumer's transaction and to implement such a change, he said.
"This reckless policy, which will make Illinois an outlier in the interconnected global payments system, must be fully and swiftly repealed by the Illinois General Assembly," Hunt said in a press release. "The provisions in this law remain a threat to the safe and secure payment processing system that protects businesses and consumers every day."
Because there is no way for data on taxes and tips to be transmitted along with the payment, banks will have a tough time retroactively assessing the accuracy of refund requests from merchants, Hunt said.
The judge noted in her ruling that the compliance provision of the law may "still prove overwhelmingly arduous for the financial institutions, but a full review of the record requires
this result."
Banks, particularly smaller community-based institutions, have long opposed efforts by large retail megastores to reduce interchange fees—often through federal legislation such as Credit Card Competition Act or the Durbin Amendment— because they believe such actions act amount to "government price-setting" that directly reduces bank revenue.
The Office of the Comptroller of the Currency, which charters and examines national banks, had filed an
But the judge rejected that view, stating that swipe fees are set centrally by Visa and Mastercard regardless of which bank issues a card.
"The payment card networks built this ecosystem, and the payment card networks set these fees," Kendall wrote. "To claim that the [Illinois law] impermissibly interferes with the power set out in the NBA — which 'should be arrived at by each bank on a competitive basis and not on the basis of any agreement' — does not add up in the face of that reality."
