You may have seen advertisements warning of “credit card chaos” coming to Illinois this summer, but the reality is much more complicated.
The advertisements, largely spearheaded by the Electronic Payments Coalition lobbying group, are targeting a bill passed in 2024 known as the Interchange Fee Prohibition Act, which would prohibit banks, credit unions and credit card companies from collecting so-called “swipe fees” on the sales tax portion of transactions, as well as on tips paid using debit and credit cards.
The bill still allows for the fees to be collected on the actual sale prices of items, but banks and credit card companies have said that the legislation would create huge challenges and could result in significant financial penalties for non-compliance, and as a result the legislation has been challenged in court and has come under federal scrutiny.
So what is the “Interchange Fee Prohibition Act”? Why has it been so controversial? And when would the bill go into effect if it’s allowed to stand?
Here’s what to know.
What is the Interchange Fee Prohibition Act?
Shoppers have likely noticed that some retailers have begun charging different prices for cash or credit transactions. The difference, generally involving a fee of 1-to-3%, comes as a result of fees assessed by financial institutions on all card-based transactions, known commonly as “swipe fees.”
The state of Illinois is seeking to prohibit those companies from assessing the fees on certain portions of transactions, namely on the collection of sales taxes and on tips given to servers at restaurants, bars and other retailers.
Why are financial institutions so heavily against the measure?
Banks have argued the current system only asks for the total amount of a transaction when calculating the swipe fee. Separating out the different portions of a transaction, they argue, could mean consumers would have to swipe multiple times for the same transaction, or pay cash to cover taxes and tips.
They argue the bill would impact rewards programs, and would impact their ability to detect and prevent fraud.
According to the International Center for Law and Economics, the bill is aimed at protecting merchants from having to pay interchange fees on sales taxes and gratuities, but the law as written would require merchants to transmit detailed tax and gratuity data during payment authorization, and would also require merchants to retroactively recover interchange fees.
The Illinois Retail Merchants Association and other lobbying groups have contested those arguments, saying they’re based on scare tactics and that software upgrades, similar to those implemented when debit and credit cards were required by law to utilize chip technology, would be all that’s needed to make the law workable.
Rob Karr, president and CEO of the IRMA, says the bill would remove a large cost driver for businesses, and potentially for customers as well.
“I can’t guarantee you that every single price is gonna go down by the same amount because lots of things go into prices. But anytime you can withdraw a cost driver, it helps, in our case, the retailer control their prices,” Karr said.
What about the advertisements targeting the law?
Illinois consumers have undoubtedly seen advertisements saying that “credit card chaos” could reign in the state if the bill is allowed to go into effect ton July 1.
“Unless Springfield fixes this mistake, your debit or credit card may not work to pay tips or sales tax starting July 1st,” says the advertisement from the Electronic Payments Coalition.
The lobbying group — which represents banks, credit unions, credit card communities — is spending millions of dollars on an ad campaign to try to block the Illinois Interchange Fee Prohibition Act.
Karr believes the advertisement creates misinformation for consumers.
“They are literally looking to create chaos of their own making. They don’t have to do that. They’re trying to drive fear into their customers,” Karr said.
Have there been legal challenges to the law?
The law is set to go into effect on July 1, but it is facing legal scrutiny on multiple fronts.
The Office of the Comptroller of the Currency, a federal agency, issued a notice earlier this year arguing Illinois can’t legally limit swipe fees for federally chartered banks.
The law was also challenged in Illinois courts, with a federal judge ruling in the state’s favor. That ruling was appealed, but an appeals court has sent the measure back to district court for a ruling, according to attorneys.
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