On August 15, 2024, the Illinois Bankers Association, American Bankers Association, America’s Credit Unions, and Illinois Credit Union League filed a complaint for declaratory and injunctive relief against the Illinois Attorney General challenging the enactment of the Interchange Fee Prohibition Act (the “IFPA”). The 74 page complaint seeks a declaratory judgment that the IFPA is preempted by federal laws, unconstitutional, and invalid as applied to any participant in the payment system, and to permanently enjoin the state from taking any investigatory or enforcement actions under the IFPA.
“While we continue to encourage state lawmakers to reconsider the IFPA, we cannot take the chance that this misguided gift to corporate megastores takes effect and damages our state’s economy,” Illinois Bankers Association President and CEO Randy Hultgren said. “Left unchecked, the IFPA will wreak havoc at the register every time people use their credit or debit card in Illinois, creating confusion for consumers and higher costs for small businesses and banks in our state. This is why we are standing together with ABA and our credit union colleagues in this important fight.”
On May 29, 2024, Illinois lawmakers passed an omnibus budget bill (HB4951) that includes the Interchange Fee Prohibition Act, which Illinois Governor J.B. Pritzker signed into law on June 7, 2024. Effective July 1, 2025, the IFPA prohibits the collection of debit and credit card interchange fees for sales taxes, excise taxes and gratuities if the merchant informs the acquiring bank of the amount of these taxes and gratuities. The merchant can either submit the amount of taxes and gratuities at the time of the transaction authorization or settlement or seek reimbursement within 180 days of the transaction date. Issuers, payment card networks, acquiring banks and processors cannot increase the rate or amount of fees on the portion of the transaction subject to interchange to circumvent the effect of the law. The IFPA also prohibits participants involved in an electronic payment transaction (except the merchant) from transferring or using data from that transaction except to facilitate or process the transaction, or as required by law. Violations of the foregoing subject the entity to a civil penalty of $1,000 per transaction and the issuer must refund the merchant any interchange fee collected on taxes or gratuities.
The lawsuit comes as no surprise since programming for these one-off state laws can be a very cumbersome process for all parties and significantly increase compliance costs. The complaint explains that interchange fees compensate card issuers for the costs and risks associated with processing card transactions, which also benefit cardholders and merchants. The complaint also articulates that payment transaction data is used for fraud detections, account reconciliations, BSA/AML programs, credit limit determinations, card disputes, and reward programs.
In its introduction, the Plaintiffs succinctly summarize their arguments as follows:
If allowed to take effect, the [IFPA] would not only throw well-operating payment card systems into chaos, it would also undermine the significant benefits, safety, and security that payment card systems provide to all participants. But the [IFPA] is unlawful. It usurps the federal government’s sole regulatory authority over multiple types of federally chartered financial institutions; and in turn, it runs afoul of multiple provisions of federal and state law designed to ensure that federal and state financial institutions operate on a level playing field and are not treated in a discriminatory manner. The IFPA therefore cannot be enforced against national or state banks, federal or state savings associations or savings banks, federal or state credit unions, card networks, or any other participants in the electronic payment processing ecosystem that are integral to facilitating card transactions.
The Plaintiffs make the following arguments to support the declaratory and injunctive relief sought:
- The IFPA is unconstitutional and preempted by the National Bank Act (“NBA”) because it significantly interferes with a national bank’s exercise of its enumerated and incidental powers, citing the Barnett Bank standard from Cantero. If preempted under the NBA, the IFPA cannot be applied to IL or other state chartered banks under 205 ILCS 5/5(11) (gives Illinois state banks parity with national banks) and the dormant Commerce Clause.
- The IFPA is unconstitutional and preempted by the Home Owners’ Loan Act (“HOLA”) because HOLA allows Federal savings associations to obtain a federal charter and acquire comparable powers to those the NBA grants national banks.
- The IFPA is unconstitutional and preempted by the Federal Credit Union Act (“FCUA”) because the FCUA preempts any state law purporting to limit or affect a federal credit union’s enumerated or incidental powers. If preempted under the FCUA, the IFPA cannot be applied to state chartered credit unions under 205 ILCS 305/65 (gives Illinois state credit unions parity with federal credit unions) and the dormant Commerce Clause.
- The IFPA is unconstitutional and conflicts with the powers granted to the Federal Reserve under the Durbin Amendment to the Electronic Fund Transfer Act to “prescribe regulations … regarding any interchange transaction fee that an issuer may receive or charge with respect to an electronic debit transaction.” 15 U.S.C. § 1693o-2(a)(1), (a)(3)(A). Regulation II does not carve out taxes and gratuities from the transaction amount in the uniform standard for debit card interchange.
- The IFPA requires complex, impracticable, and costly changes to card payment processing to exclude taxes and gratuities and requires immensely burdensome processes to handle manual merchant requests for reimbursement. The Plaintiffs also plead some members’ expected resources, timelines, and costs to implement the IFPA (with one member stating it expects to invest well over $10 million to comply).
- The IFPA’s limitations on the use of transaction data interferes with “fraud detection, claims investigation, accounting reconciliation, Know Your Customer and anti- money laundering compliance programs, credit limit determination; card offers, features, benefits, and rewards and cash back processing; as well as the exercise of other powers granted by the NBA, HOLA, FCUA, and these statutes’ accompanying regulations.”
- The IFPA additionally creates significant burdens for consumers and merchants. For consumers, the IFPA would impact fraud protections and cardholder rewards. For merchants, the IFPA would require new hardware or software to process transactions that bifurcate the transactions into two amounts, impacting small businesses most. (Recall, most merchants purchased new point of sale terminals to acquire chip card and tap to pay transactions in recent years.)
Likely, to avoid associational standing issues that were raised in the lawsuit to challenge the credit card late fee rule, Plaintiffs devote 19 paragraphs in the complaint to plead associational standing and impacts to members. Plaintiffs additionally devote 16 paragraphs to educating the court on the intricacies of payment systems and showing money movements from all the participants.
We are curious to see the Illinois Attorney General’s response. This lawsuit may impact whether other states attempt to regulate interchange as attempts to pass the Credit Card Competition Act to lower credit card interchange have stalled and the Federal Reserve has not issued its final rule to lower debit card interchange and is defending its current debit card interchange rule in the Corner Post lawsuit (which case was recently remanded to the Eighth Circuit for further proceeding after determining that Corner Post had standing to challenge the longstanding rule).
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