- Key insight: A federal judge upheld a novel Illinois law that bans swipe, or interchange fees, on sales taxes and tips.
- What's at stake: Because swipe fees are set by Visa and Mastercard, rather than by individual banks, the judge rejected banks' argument that the state law was subject to federal preemption under the National Bank Act.
- Forward look: Banks are expected to appeal the decision and seek an emergency stay of the Illinois law, which is scheduled to take effect on July 1.
A federal judge upheld an 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 claim 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 because banks do not directly charge interchange fees, but rather receive the swipe fees 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 swipe fees on the sales tax, excise tax and tip portions of credit, debit and prepaid card transactions in Illinois.
"[The] ruling is a historic win for Main Street over Wall Street and will save businesses and consumers millions of dollars a year," said Rob Karr, president and CEO of the Illinois Retail Merchants Association.
Illinois is the first state to restrict swipe fees. Kerr said he looked forward to working with
Gov. JB Pritzker, Illinois Senate President Don Harmon, Illinois House Speaker Emanuel "Chris" Welch and members of the General Assembly to ensure the law is implemented as scheduled on July 1. Kerr said he "hopes the measure can serve as a model for other states to seek relief for businesses and working families struggling with higher costs."
Merchants argued that it is unfair for them to pay swipe fees on taxes and tips because the fees get passed on to the state and employees while they are stuck paying interchange fees on those amounts without being reimbursed.
"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.
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.
Kantor said it's "unfair" for retailers to be charged swipe fees on taxes and tips, when the merchants are passing those charges on to the state and retail employees. "The fees drive up prices for consumers at a time when affordability is the key issue facing our nation's economy," he said.
The swipe fee ban wasn't a standalone victory; it was a political maneuver, secretly tucked into the state's 2024 budget to placate retailers who had just been slapped with a $1,000 monthly cap on their sales tax collection reimbursements.
In 2024, the Illinois Bankers Association sued Illinois Attorney General Kwame Raoul challenging the act. Bankers claimed restricting fees on taxes and tips violates federal law and should be blocked.
The fight isn't just about fees. Banks rake in up to 3% on every swipe, using the revenue—paid for by all consumers— to fund lavish rewards for their wealthiest cardholders. Critics charge that swipe fees are a hidden tax on the poor, subsidizing the elite's travel miles and cash-back programs
Richard Hunt, executive chairman of the Electronic Payments Coalition, called on Illinois lawmakers to repeal the law. Currently no system exists to create a carve-out for separate portions of a consumer's transaction, 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 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 [National Bank Act] — 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."
