Lenders Bring Suit Against Illinois’s Newly Enacted Interchange Law

Several organizations representing banks and credit unions filed a lawsuit late Thursday challenging Illinois’s Interchange Fee Prohibition Act, which was signed into law June 7.

The lawsuit, filed in United States District Court for the Northern District of Illinois, was brought by the Illinois Bankers Association, The American Bankers Association, the Illinois Credit Union League, and America’s Credit Unions, formerly the National Association of Federally-Insured Credit Unions.

The Illinois Interchange Fee Prohibition Act exempts merchants in the state from paying interchange on sales tax and gratuities levied on credit and debit card transactions. Interchange is the fee merchants pay to processors on card transactions, typically a percentage of the transaction.

In exchange for the exemption, the state will cap what merchants earn for collecting sales tax at $1,000 per month. Before, Illinois merchants were allowed to keep 1.75% of the sales tax collected per month as compensation for acting as agents of the state. The deal was reportedly one of the most generous sales-tax discount programs for local merchants in the country.

The law was passed during the Illinois legislature’s spring session as part the state’s budget for the coming fiscal year. It is scheduled to go into effect July 1, 2025, the start of the state’s 2026 fiscal year.

In their complaint, the plaintiffs allege that, if the law is allowed to take effect, it “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 complaint also alleges that the law “usurps the federal government’s sole regulatory authority over multiple types of federally chartered financial institutions” and runs counter to “multiple provisions” of federal and state laws that ensure a level playing field for financial institutions and that they are not treated “in a discriminatory manner.”

“Our membership collectively believes the law takes the wrong direction,” says Ben Jackson executive vice president of government relations for the Illinois Bankers Association. “Our members have given us a clear directive to overturn the law through legislative and other measures. The complaint, which speaks for itself, is one of those other measures.”

The Electronic Payments Coalition, a lobbying organization representing payment networks and card issuers, voiced its support for the lawsuit, calling it a ploy by large merchants to increase their margins and arguing that the law was passed during budget negotiations without any public hearings or input.

“No stone will be left unturned to correct this draconian disruption to the safe, secure, hassle-free credit card system Illinois consumers, small businesses, and community financial institutions rely on every day,” EPC chairman Richard Hunt says in a statement.

By contrast, the Merchants Payments Coalition, which lobbies on behalf of merchants on interchange and related matters, argues the claims made in the lawsuit don’t bear scrutiny.

“The state of Illinois is likely to prevail [in this case] because allegations about how hard it will be to implement the law and that it runs afoul of federal and state laws are mistaken,” says Doug Kantor, an MPC executive committee member and general counsel for the National Association of Convenience Stores. “Banks are upset with the law because it sends money in the other direction [to merchants].”

Proponents of the law add they were not surprised by the lawsuit.

“This lawsuit was expected, and it’s no surprise credit card companies would do all they can to undermine this law and maintain their ability to unilaterally impose exorbitant processing fees on workers’ tips and taxes on consumer purchases,” Rob Karr, president and chief executive of the Illinois Retail Merchants Association says by email.

Karr argues the law will “provide tangible relief to Illinois workers, families, and retailers of all sizes and types by limiting the fees financial institutions can charge on the sales and excise tax and tips portion of transactions.”