In a blow to the banks, pioneering swipe fee law survives first legal
challenge
[February 12, 2026]
By Maggie Dougherty
CHICAGO — A first-in-the-nation law that would prohibit banks and credit
card companies from charging swipe fees on tips and taxes survived a
major hurdle in court Tuesday, but opponents vow it will not be the last
challenge.
Financial institutions including the Illinois Bankers Association and
Illinois Credit Union League filed a lawsuit against the Interchange Fee
Prohibition Act in late 2024, arguing it would create an overly complex
and burdensome payments system for debit and credit card purchases.
However, U.S. District Judge Virginia Kendall upheld the law, creating a
tight timeframe for Illinois businesses to set up processes for
compliance ahead of the July 1, 2026, deadline. Implementation of the
law has already been pushed back by a year to allow time for the legal
dispute to be resolved.
The IFPA law was folded into Illinois’ Fiscal Year 2024 budget as an
appeasement to retailers to offset losses after the governor and
legislators capped an existing tax discount claimed by retailers to fill
a budget gap.
The Illinois Retail Merchants Association and the National Restaurant
Association cheered the ruling, calling the win a meaningful step that
will allow other states to follow in Illinois’ footsteps.
“Today’s ruling is a historic win for Main Street over Wall Street and
will save businesses and consumers millions of dollars a year,” Rob
Karr, president and CEO of the Illinois Retail Merchants Association
said in a statement. “As the first law in the nation to restrict onerous
swipe fees, we hope this measure can serve as a model for other states
to seek relief for businesses and working families struggling with
higher costs.”
The bill faced strong criticism from banks and small business interests
with the Illinois Chamber of Commerce, Illinois State Black Chamber of
Commerce and Illinois Hispanic Chamber of Commerce, all arguing that the
process of separating out the tip and tax portions of fees would be
costly for small business owners, limiting payment options and
disrupting safe and trusted payment systems.
In her ruling, Kendall acknowledged that it was a “close case” due to
the lack of precedent in other states.
What are interchange fees?
Each time a shopper swipes their credit or debit card, it sets off a
complicated network of payments between the consumer’s bank and the
retailer’s bank. The retailer’s bank pays an “interchange fee,”
typically around 2% of the transaction cost, to the consumer’s bank.
Those fees paid by retailers are often passed on to consumers.
Once IFPA goes into effect, retailers will no longer have to pay those
fees on the tip and tax portion of the transaction, theoretically
shielding customers from paying for them.
However, the banks argue that interchange fees are there for a reason —
to compensate financial institutions for bearing the risk of fraud.
During oral arguments in the case, the attorney general’s office argued
in favor of IFPA and said the amount of interchange fees banks would be
able to collect would only be reduced by about 9 to 10%.
Attorney Charlotte Taylor, representing the Illinois Bankers
Association, said 9 to 10% could cut into profit margins significantly.
“Imagine you’re making a 5% profit, which is a reasonable profit margin
for a business, then suddenly 10% of that profit is taken away,” Taylor
said. “Now you’re operating at a 5% loss.”
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The Electronic Payments Coalition, a lobbying group representing major
financial institutions and payment networks like Visa, Mastercard and
American Express as well as credit unions and community banks, issued a
statement calling on Illinois legislators to repeal the bill after the
judge’s ruling.
The coalition pointed to a study it published in late 2024, finding that
“40 of the largest retailers will soak up nearly 40 percent of the
estimated $118 million reduction in interchange. The top 10 largest
retailers — Amazon, Walmart, Home Depot, Verizon, Apple, AT&T, Costco,
CVS, Walgreen and Kroger — will receive 21.4 percent of the savings.”
The rest of the savings, it said, would be split amongst roughly 1.3
million small businesses in Illinois.
Implementation, legal questions
Small business advocates including the Illinois State Black Chamber of
Commerce have argued that the law will lead to higher costs and
administrative headaches for business owners as they will need to
purchase new software and equipment upgrades and devote more time to
accounting. They also warn of increased fraud risks and privacy concerns
for consumers.
Proponents of IFPA argue that implementation should be simple, as
retailers are already prohibited from charging fees on purchases made
through government programs such as the Supplemental Nutrition
Assistance Program, and because the tip and tax portion of charges is
already separated in financial systems.
“There is no doubt that the IFPA presents complicated compliance
challenges,” Kendall acknowledged in her ruling, but ultimately ruled
that the law requires such compliance, even if it proves “overwhelmingly
arduous” for financial institutions.
“These compliance costs, among others, are undeniable,” Kendall wrote.
“But State (and federal) laws will always require some kind of
compliance cost, no matter who bears it.”
Beyond the cost of implementation, the banks argued that the law
violated the Supremacy Clause of the Constitution by preempting the
National Bank Act, which establishes the role regulating nationally
charted banks as a federal power.
Kendall rejected that argument, though, as interchange fees are set by
payment networks, and not banks directly. She did, however, side with
the banks on a separate question regarding data sharing restrictions.
IFPA prohibits all involved parties other than retailers from sharing
data that exceeds the information necessary to complete the transaction
or as required by law. That data sharing statute, Kendall found, is
preempted by federal law granting financial institutions broad power to
engage in data processing.
Other state legislatures will now likely look to the outcome in Illinois
as they consider their own regulations for interchange fees.
The Illinois Bankers Association and Illinois Credit Union League
announced after the ruling they would file an appeal in coming days.
“In light of this outcome, we renew our call for state lawmakers to
repeal this flawed law before it can do any more harm to the Illinois
economy,” the plaintiffs that sued IFPA wrote in a joint statement.
“The fight over IFPA and any similar proposal will continue.”
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