A federal judge on Tuesday upheld Illinois’ first-in-the-nation law that bars banks and card networks from charging interchange, or swipe, fees on the sales tax, state excise taxes and gratuity portions of credit and debit card transactions, clearing a major legal hurdle ahead of the law’s planned July 1 effective date.
When retailers collect taxes or tips on behalf of the state or employees, they are normally charged swipe fees on the full transaction amount, including taxes and gratuities. The law, known as the Interchange Fee Prohibition Act, ensures that retailers will no longer have to pay these fees on amounts they do not retain as revenue, providing potential relief from rising processing costs.
U.S. District Judge Virginia M. Kendall of the Northern District of Illinois ruled that federal banking laws do not override Illinois’ law, denying a request by a coalition of banking groups for a nationwide injunction that would have blocked enforcement. The court did strike one provision of the law concerning how merchants or banks can use transaction data, finding it conflicts with federal law, according to the ruling.
In her opinion, Kendall noted that interchange fees are set by card networks such as Visa and Mastercard, not the banks themselves, weakening the plaintiffs’ argument that the National Bank Act preempts the state law. The plaintiffs—including the American Bankers Association, Illinois Bankers Association, America’s Credit Unions, and Illinois Credit Union League—had argued that federal statutes governing national banks and credit unions prevent states from regulating card fees.
Passed as part of Illinois’ 2024 state budget and signed by Gov. J.B. Pritzker, the Interchange Fee Prohibition Act was negotiated by retailer groups to help offset some credit card processing costs. Its implementation was delayed to July 1, 2026, to allow time for the legal challenge to work through federal court.
Proponents say the ban will provide meaningful relief to retailers by lowering costs on portions of transactions they do not profit from, according to the National Restaurant Association. Critics warn that compliance could be challenging for banks and payment processors. Banking groups have vowed to appeal Kendall’s ruling to the U.S. Court of Appeals for the Seventh Circuit, according to the ruling.
Illinois’ swipe-fee exemption is part of a growing trend. In Pennsylvania, the House Finance Committee recently advanced legislation that would bar card networks from charging interchange fees on the sales tax portion of transactions, according to the Pennsylvania General Assembly. Similar proposals have been introduced in states including North Carolina, Connecticut, California, New York and Arizona, as retailers push for relief from fees on taxes and gratuities while federal reforms remain stalled.
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