‘Credit card chaos’? Financial institutions bet big on repeal of
first-of-its-kind Illinois law
[April 16, 2026]
By Jerry Nowicki
“Credit cards may not work for sales tax or tips starting July 1.”
By now, you’ve heard that claim, but whether it’s true depends on who
you ask.
The ads — funded by the Electronic Payments Coalition of banks, credit
unions and card companies — argue that Illinois lawmakers must repeal
the state’s first-in-the-nation Interchange Fee Prohibition Act, slated
to take effect July 1. That law prohibits financial institutions from
charging “swipe,” or interchange, fees on the tax and tip portions of
consumer bills and bans them from making up the fees elsewhere.
If it’s not repealed? “Credit card chaos” may ensue, the ads warn.
While the financial institutions are quick to cite a list of things that
could hypothetically happen if the law isn’t repealed, it’s harder to
pin down what’s being done and by who to comply with the law two years
after it was signed.
“The global payment system is not set up to where any one party to a
transaction can make this happen on their own,” Ashley Sharp, of the
Illinois Credit Union Association said at a Capitol news conference
Wednesday. “There are multiple parties to every electronic transaction.”
The financial institutions are adamant that the global payment system as
it exists today can’t discern the difference between tax, tips and
total, and it would need to be retooled at a heavy cost to banks, card
companies, merchants, point-of-sale companies and more.
Instead of complying, they say, the card companies could decide to stop
serving Illinois or drastically alter the way the consumer interacts
with merchants at the point of sale.
An alternate reality
But as with all matters in Springfield, there’s another big-monied and
powerful group on the other side of the issue. The Illinois Retail
Merchants Association says the credit card companies already track all
the information they need, and it’s a “complete fabrication” to say that
it would take more than a mere coding change to implement the state law.
Take your restaurant receipt, for example.
“You have the subtotal, the sales tax, the tip, if it’s applicable, and
then the grand total, right? All they have to do is move their fee from
the grand total to the subtotal,” Rob Karr, president of IRMA, said.
While card networks operate in over 200 countries with as many different
laws, they say the only information the card processors ask for in any
of them is the grand total. The receipt example, they say, erroneously
conflates the point of sale with the actual processing of payments.
In short, the two sides present starkly different realities — a muddying
of the water that’s not uncommon at the Capitol.
But there is one concrete truth: The financial institutions have a lot
to lose, and not just in Illinois.
The tax and tip prohibition would shave approximately 10% off the
revenue that banks and credit unions receive from retailers via
interchange fees — a transfer of wealth likely to number in the hundreds
of millions. It would also create massive noncompliance fines.
And then there’s the issue of precedent. The banks challenged the law
but lost in court. Absent a successful appeal, the remaining
battlefields would be other state legislatures.
If the card companies implement Illinois’ law, they’d be providing a
blueprint for states across the nation to emulate — driving potential
revenue loss into the billions.
Thus far, Ben Jackson of the Illinois Bankers Association said, it
hasn’t opened the floodgates, although some 30 states are considering
similar action.
Still, it’s no wonder then, that the Electronic Payments Coalition has
pulled out all the stops in its seven-figure ad campaign to repeal the
law.
How we got here
To fully understand the ongoing slugfest between banks and retailers,
you have to go back to May 2024.
But first, an explanation of interchange fees. Each time a shopper
swipes their credit or debit card, it sets off a complicated string of
payments between banks. The retailer’s bank pays an “interchange fee,”
typically around 1% to 2% of the transaction cost, to the consumer’s
bank. The fees include both a set amount and a percentage of the
transaction, but the credit card companies, namely Visa and Mastercard,
control how they’re calculated.
The financial institutions say interchange fees help fund credit card
reward programs and security upgrades and provide compensation for
bearing the risk of fraud. The hit to interchange revenue, Jackson said,
would inevitably lessen reward program offerings. Sharp said credit
unions, as not-for-profit cooperatives, use the revenue to offer lower
rates to customers.
But the fees have long drawn the ire of retailers and small businesses,
which sometimes pass the costs directly to consumers via a surcharge on
bills.
It comes down to this: The retailers don’t think they should have to pay
a fee on the tax and tip portion of a transaction that they don’t keep.
And the financial institutions say if they’re handling those funds, they
should be compensated for doing so via interchange fees.
As for the Illinois law’s passage, it was, as the ads claim, tucked into
the budget two years ago, giving little time for the bankers et al to
mount an opposition campaign.
Gov. JB Pritzker and lawmakers agreed to raise about $101 million in
revenue to plug a budget hole by putting a $1,000 monthly cap on the
“retailer’s exemption,” a tax break retailers claim for being the
state’s de facto sales tax collectors.
But the retailers weren’t going to take that lying down, and IRMA
successfully lobbied for the long-sought tax and tip exemption.
After the law passed, the financial institutions quickly sued.
To avoid uncertainty as the case played out, lawmakers delayed the
measure’s effective date from July 1 last year to the same date this
year.
[to top of second column]
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Ben Jackson of the Illinois Bankers Association urges lawmakers to
repeal a state law that prohibits financial institutions from
charging fees on the tax and tip portion of debit card transactions.
(Capitol News Illinois photo by Jerry Nowicki)
U.S. District Judge Virginia Kendall ultimately determined in February
that Illinois is within its right to regulate the fees. She partially
rejected a portion of the law that prohibited banks from sharing certain
data, which the credit unions say creates different rules for different
institutions and further uncertainty.
The case is now pending appeal, and the legislative process is starting
anew.
This time, the financial institutions have mounted a dual front in the
court of public opinion.
The cost of compliance
Karr estimated the prohibition would bring in “north of $200 million”
for retailers — essentially letting them pocket that sum instead of
transferring it to the banks. A study by the Electronic Payments
Coalition pegged the number at $118 million, estimating that about 40%
of the interchange windfall would go to the 40 largest retailers.
Even so, Karr said, the largest retailers are subject to the $1,000
monthly retailer exemption cap that accompanied the swipe fee ban, while
smaller retailers don’t reach that mark. Add in their cut on reimbursed
swipe fees, and it amounts to what Karr calls “the largest small
business relief that Illinois has ever passed.”
But Jackson argued the cost of retailers complying could eat up any
benefits for smaller retailers.
As for compliance, Kendall wrote in her February opinion that “It is an
open question whether the transaction process could adapt to the impact
of the IFPA in time.”
“The Interchange Fee Provision is indisputably disruptive, requiring
additional investments, hires, and new procedures to replace the current
process for authorizing and settling debit and credit card
transactions,” she wrote.
The financial institutions argue it can’t all be done by July 1. Kendall
said the parties involved know what’s required of them.
“But those procedural changes are the product of an ecosystem built by
Payment Card Networks and financial institutions to facilitate consumer
transactions,” she wrote. “And these entities understand the onus of
IFPA compliance is on them.”
Per the coalition, compliance “would require coordination across the
industry and regulators worldwide,” including with the International
Organization for Standardization. It would also require more data
collection, creating privacy concerns, they say.
Those global changes would require testing and certification of new
equipment. Depending on their card companies or point-of-sale vendors,
retailers may need to invest in new equipment, software and training.
Banks and credit unions may also have to add staff to process rebates
under the law. It allows retailers or their processing companies to
petition their financial institutions for reimbursement on fees charged
on tax and tips within 180 days of a transaction.
If financial institutions don’t comply within 30 days, the law provides
for civil penalties of $1,000 per each transaction — and hundreds of
millions of these transactions happen annually.
So will that chaos come to fruition?
Instead of complying, according to the coalition’s literature, the card
companies could just stop processing cards altogether in Illinois. They
could also stop processing tax and tip portions or require two separate
swipes for the subtotal and the tax and tip portion of bills.
Such claims aren’t uncommon in the legislature’s annual adjournment
push.
Sports betting companies, for example, threatened to leave Illinois when
the state raised its gambling taxes in the same budget cycle that
yielded the interchange fee prohibition two years ago. Instead, they
adapted, because Illinois has a lot of bettors — and there’s even more
card users.
Karr accused the coalition of ulterior motives in their use of
hypothetical language.
“There is no need for chaos,” he said. “The only chaos is if the credit
card companies impose it themselves on their consumers.”
Ultimately, lawmakers will have to weigh how compelling the arguments
are, if the courts don’t intervene first.
It’s possible that the 7th Circuit appellate court — or even the U.S.
Supreme Court — gives the banks a win. But oral arguments are slated for
May 13, meaning the appellate court might not rule by the time the law
is slated to take effect.
Adding a new wrinkle on Wednesday, the federal office of the Comptroller
of the Currency, a subset of the U.S. Treasury Department, appeared
poised to issue an order preempting Illinois’ law. It hadn’t been
published as of late Wednesday, making its impact unclear.
“While the office has failed to explain their reasoning or allow public
review, it’s clear the goal is an end-run around the legal process after
a judge recently upheld the law,” Karr said.
As for the legislative prospects, state Rep. Margaret Croke, D-Chicago,
says she’s seen enough to be concerned. The Democratic nominee for
comptroller is sponsoring a bill to fully repeal Illinois’ interchange
fee prohibition.
But as of last week, she said she wasn’t planning to move it. Instead,
she finds it more likely that lawmakers once again delay the law’s
implementation.
“If this is a policy that the state of Illinois decides they’re going to
want to have, then we need to make sure we’re doing it properly,” she
said.
Jerry Nowicki is the editor-in-chief of Capitol
News Illinois,
a nonprofit, nonpartisan news service that distributes state government
coverage to hundreds of news outlets statewide. It is funded primarily
by the Illinois Press Foundation and the Robert R. McCormick Foundation |
