In a significant legal development, the U.S. District Court for the Northern District of Illinois has upheld the state’s Interchange Fee Prohibition Act (IFPA), a pioneering statute that prohibits financial institutions from imposing interchange fees on the tax and gratuity portions of credit and debit card transactions. This ruling marks a pivotal moment in the ongoing discourse over the regulation of payment processing fees.
The IFPA, enacted in June 2024, was designed to alleviate the financial burden on merchants by preventing banks and credit card companies from charging fees on amounts collected for taxes and tips. These fees, commonly referred to as “swipe fees,” have been a contentious issue, with merchants arguing that they unfairly inflate operational costs. The law was set to take effect on July 1, 2025, but its implementation was delayed by a year to allow for legal challenges to be addressed.
A coalition of banking and financial institutions, represented by prominent law firms Jones Day and Skadden, Arps, Slate, Meagher & Flom, contested the IFPA, asserting that it conflicted with the National Banking Act, which permits banks to levy noninterest charges and fees. However, Judge Virginia Kendall dismissed these claims, emphasizing that banks do not set or directly charge interchange fees but merely receive them. She noted that the payment card networks, such as Visa and Mastercard, are responsible for establishing these fees, thereby undermining the argument that the IFPA interferes with federal banking powers.
Judge Kendall’s 47-page decision underscored the distinction between the roles of banks and payment card networks in the fee-setting process. She stated, “The payment card networks built this ecosystem, and the payment card networks set these fees.” This clarification was instrumental in her determination that the IFPA does not infringe upon the rights of national banks under federal law.
The ruling has been met with approval from merchant associations, who view it as a victory for local businesses. Sean Kennedy, executive vice president of Public Affairs for the National Restaurant Association, remarked, “This decision is a meaningful win for Illinois restaurants that have been shouldering rising costs on every transaction.” He further suggested that the ruling could serve as a model for other states seeking to address credit card processing fees, which are among the highest and fastest-growing expenses for restaurant owners.
Conversely, financial institutions have expressed their dissatisfaction with the court’s decision. The Illinois Bankers Association and the Illinois Credit Union League issued a joint statement expressing “deep disappointment” and indicated plans to appeal the ruling. They argue that the IFPA will introduce complexity and potential disruptions to the payment processing system, ultimately affecting consumers and businesses alike.
The IFPA is scheduled to take effect statewide on July 1, 2026. As the legal landscape continues to evolve, this case may set a precedent for similar legislative efforts across the United States, potentially reshaping the framework of interchange fee regulations and their impact on merchants and financial institutions.