A legal challenge to Illinois’ first-in-the-nation law prohibiting credit card “swipe fees” on taxes and tips has failed, potentially opening the door for similar legislation in other states and intensifying the ongoing debate over interchange fees charged by the credit card industry. The ruling, handed down by a federal judge last week, comes as Congress considers broader reforms to address these fees, which merchants argue drive up costs for consumers.
U.S. District Judge Virginia Kendall upheld the Illinois Interchange Fee Prohibition Act (IFPA), rejecting arguments from banks and credit unions that the law would create an overly complex and burdensome payments system. The IFPA, originally passed in late 2024 as part of the state’s Fiscal Year 2024 budget, was designed to offset losses for retailers stemming from a cap on an existing tax discount. Implementation was initially slated for July 2025, but was delayed a year pending the outcome of the legal challenge.
The lawsuit, brought by the Illinois Bankers Association and the Illinois Credit Union League, claimed the law was unworkable and costly. Judge Kendall, however, dismissed these concerns, focusing on the structure of the interchange fee system itself. She noted that swipe fees are centrally set by Visa and Mastercard, regardless of the issuing bank, characterizing this as “the core snag” in the banks’ argument. The ruling suggests that the state law doesn’t interfere with core banking functions but rather addresses the fee structure imposed by the card networks.
The Merchants Payments Coalition (MPC) hailed the decision as a “major victory for merchants, their customers and their employees.” Doug Kantor, General Counsel for the National Association of Convenience Stores and a member of the MPC Executive Committee, stated that merchants are unfairly penalized for collecting taxes and tips, which are then remitted to the state and employees. He argued that these fees contribute to higher prices for consumers, particularly during a period of economic uncertainty. “Illinois lawmakers have done the right thing by passing this law and the court has done the right thing by upholding it,” Kantor said in a statement released on .
The Illinois Retail Merchants Association and the National Restaurant Association also expressed their support for the ruling, anticipating that it will pave the way for other states to adopt similar measures. Rob Karr, president and CEO of the Illinois Retail Merchants Association, described the decision as a “historic win for Main Street over Wall Street” that will save businesses and consumers “millions of dollars a year.”
Despite the court’s decision, the banking industry is expected to appeal. This suggests a protracted legal battle is likely, potentially delaying full implementation of the law beyond the current deadline. The appeal will likely center on the argument that the Illinois law is preempted by federal regulations governing national banks.
The timing of the ruling coincides with renewed efforts in Congress to address swipe fees on a national level. Lawmakers are currently considering the Credit Card Competition Act, which aims to increase competition among payment networks and lower interchange fees. The Illinois case is seen as bolstering the arguments of those advocating for federal reform. According to reports, Congress recently pushed back a vote on the Credit Card Competition Act, though the reasons for the delay remain unclear.
Interchange fees, often referred to as swipe fees, are a percentage of each transaction paid by merchants to the card-issuing bank. These fees have long been a point of contention between merchants and the financial industry. Merchants argue that the fees are excessive and contribute to higher prices for consumers, while banks maintain that they are necessary to cover the costs of fraud prevention, security, and rewards programs. The average interchange fee varies depending on the type of card and transaction, but can range from a few cents to several percent of the purchase amount.
The Illinois law specifically targets the fees charged on the tax portion of transactions and on tips. This is particularly relevant for businesses like restaurants, where tips constitute a significant portion of employee income. By eliminating swipe fees on tips, the law aims to ensure that workers receive the full amount of their gratuities. Similarly, removing fees on sales tax reduces the overall cost of transactions for businesses.
The legal battle in Illinois is not occurring in a vacuum. A separate issue impacting retailers in the state is a reported penny shortage, which is causing headaches for businesses and consumers alike. While seemingly unrelated, both issues highlight the challenges facing retailers in managing the costs of transactions and maintaining smooth operations.
The outcome of the Illinois case and the progress of the Credit Card Competition Act in Congress will be closely watched by merchants, banks, and consumers across the country. The debate over swipe fees is likely to continue, as stakeholders grapple with the balance between promoting competition, protecting consumers, and ensuring the financial viability of the payments ecosystem.
