Dive Brief:

• Bank groups asked a federal court for summary judgment in their legal battle against Illinois over its new law that bans interchange fees on the sales tax and gratuity portions of card transactions. The Illinois law, set to take effect on July 1, has inspired similar legislation in two dozen other states.
• U.S. District Court Judge Virginia Kendall has set a hearing for April 16. In December, she granted national banks and federal savings associations a preliminary injunction, pending further litigation on the Illinois Interchange Fee Prohibition Act. She later expanded the injunction to “out-of-state state banks,” but did not halt the law with respect to federal credit unions.
• Plaintiffs argue that Kendall should grant their March 17 motion, based on her previous finding that federal laws preempt the Illinois law. Restaurateurs, retailers and other merchants support the Illinois law, and others like it, for offering relief from paying card swipe fees on portions of consumers’ tabs.

Dive Insight:

The contested Illinois law has become a model for roughly half of the country. Lawmakers in two dozen states – including Arizona, Maryland and Washington – are considering similar legislation to remove interchange fees on taxes and gratuities in credit and debit card payments, according to the Electronic Transactions Association. 

Illinois is currently the only state with such a law. The ETA is “actively engaged in the remaining 25 states to prevent the introduction or advancement of similar bills,” Scott Talbott, the association’s executive vice president, wrote Monday in an email.

The Illinois act “threatens to disturb the proper functioning of payment systems not only in Illinois but also across the country by setting a precedent encouraging other states — or even localities — to enact their own laws disrupting card payment systems,” a lawyer for three industry groups, Matthew Schwartz of Sullivan & Cromwell, wrote to Kendall on March 19.

Those groups, the Bank Policy Institute, The Clearing House Association and the Consumer Bankers Association, want Kendall to consider their 2024 “friend of the court” brief on the plaintiffs’ injunction request in her decision on summary judgment.

The Illinois Bankers Association, the American Bankers Association, and two credit union organizations sued the state in August, seeking to block the law, which carries a $1,000 fine per transaction violation, plus a refund of any illegitimate fees collected. 

The banks say interchange fees undergird the infrastructure of more than 150 billion U.S. credit and debit card transactions annually, giving banks a funding source to offset their costs and risks associated with fraud and consumer defaults. 

Banks and card networks, such as Visa and Mastercard, say the fees fund investments in payment systems and fraud prevention, but retailers argue that the fees have increased too much and have become overly burdensome. Merchants and the networks have been involved in separate litigation over these fees for two decades.

In their Illinois lawsuit, bankers said the new law “would not only throw well-operating payment card systems into chaos, it would also undermine the significant benefits, safety, and security that payment card systems provide to all participants.”

The loss of the fees and compliance costs “may drive some financial institutions to exit the market entirely,” the banks and credit unions said in their motion. “The only remaining options for many credit unions, in particular, would be to raise fees on members … adjust credit terms to increase interest rates, or abandon card services altogether.”

The banks also filed a report by an industry consultant, Tony Hayes of Boston-based Banking and Payments Group, to buttress their arguments for summary judgment.

“If one financial institution associated with a transaction has injunctive relief from the IFPA, then, by extension, all entities involved in the processing of the same transaction also need relief from the requirements of the IFPA, at least for purposes of that transaction,” Hayes wrote.

The fee is passed through the payment ecosystem, according to the motion. “The amount that the acquirer pays, the amount the card network applies, and the amount the issuer receives must be the same,” the plaintiffs wrote. “The system does not work any other way—the acquirer cannot pay more or less than the issuer receives, nor can the card network facilitate the transmission of more or less than the acquirer pays or the issuer receives.”