Judge Issues Decision Largely Upholding Illinois Interchange Law

Boom! The judge’s decision is in on the Illinois Interchange Fee Prohibition Act (IFPA) case and it’s not what any of us wanted. America’s Credit Unions is swiftly appealing the decision to the Seventh Circuit Court of Appeals. 

Background  

In 2024, despite significant opposition from the financial services industry, Illinois passed the Interchange Fee Prohibition Act. The law prohibited the application of interchange fees on sales taxes, excise taxes, and tips. Interchange fees are the cost of doing business through a secure card network. If I charge a $40 lunch and leave a $10 tip, I am sending $50 through the system. Anywhere else, the interchange fee is based on $50. But in Illinois, it would only be calculated on that first $40. It doesn’t matter if my credit union does not have a presence in Illinois; if a consumer makes a transaction in Illinois (e.g., to buy a cup of coffee at the airport) interchange fees are only charged on that $40 and not on the last $10. 

Legal Challenge  

America’s Credit Unions joined the Illinois Credit Union League, the Illinois Bankers Association and the American Bankers Association to challenge the constitutionality of the IFPA. The case was heard in the Northern District Federal Court of Illinois by Judge Kendall, who issued a stay based on federal preemption laws for national banks, savings associations, and out-of-state banks in late 2024. The stay meant that those financial institutions did not have to comply with the IFPA for the time the stay was in place. America’s Credit Unions, the Illinois Credit Union League, and other organizations filed an additional brief in January 2025 explaining why credit unions should also be granted relief.  

Decision  

Judge Kendell largely upheld the IFPA, allowing Illinois to ban interchange fees for taxes and tips. She found that there was no federal preemption for financial institutions on the interchange fee provision because financial institutions do not set the interchange fees. However, she did grant federal preemption for the data use restriction provision, which would have prevented “[a]n entity, other than the merchant” involved in a transaction to “distribute, exchange, transfer, disseminate, or use” the associated data “except to facilitate or process the electronic payment transaction or as required by law”. In other words, it banned financial institutions and card networks from reviewing aggregated transaction data to detect fraud or administer rewards programs. 

What Does This Mean (For Credit Unions)?  

This decision results in a number of significant compliance challenges for credit unions across the country. Any member from any credit union who uses their card in the state of Illinois subjects that credit union to compliance requirements. Even a traveler grabbing lunch or a souvenir on a layover may incur charges that need to be split between purchase and sales tax.  

• The process would start with Card Networks implementing new specifications, which take significant time and resources to develop. Issuers and Acquirers would then have to adopt those specifications at significant cost. Merchants, too, would likely have to purchase new point-of-sale terminals and new software to run them.  
• Financial institutions of all sizes will have to track state and local sales taxes on purchases that take place in Illinois, plus excise taxes such as a gas tax that is built into the price of fuel, rather than charged separately. 
• Financial institutions will need to develop procedures, hire new staff, and train existing employees to receive, evaluate, and audit the documentation they may receive from the immense number of merchants. 
• The IFPA may be implemented by merchants requesting refunds for the interchange fees charged on taxes and tips. Merchants will have to bear expenses associated with obtaining new point-of-sale terminals and new software to run programs that separate the taxes and tips from the product. 
• America’s Credit Unions and the other plaintiffs are appealing the decision as soon as possible and are evaluating our options regarding the impending July 1, 2026 effective date. That is less than five months for financial institutions to take all the necessary measures described above to ensure they will be compliant at the deadline. A small credit union in Alaska may never have a transaction from Illinois, or it might have several, should it have members that regularly travel to Chicago. The risk will be difficult to estimate. 
• The penalty for errors is $1,000 per transaction. A financial institution caught unprepared could rack up tens or even hundreds of thousands of dollars in fines by the time it identifies the transactions. 

Many other states have proposed or introduced laws similar to this one. Illinois’ success in defending this law may embolden them to move that legislation forward. It is possible that the burden of compliance with this and potentially other laws will cause a chaos that prompts the U.S. Congress to step in. One associated concern is that Congressional action could cap credit interchange similar to debit interchange. 

Next Steps  

The plaintiffs in the suit, including America’s Credit Unions, put out a statement in response to the judge’s ruling. It states: 

“We are deeply disappointed by today’s ruling; and, given the July 1 implementation date of the Illinois Fee Prohibition Act, we will appeal this decision. As the co-plaintiffs demonstrated and the OCC agreed, IFPA is clearly and fully preempted by federal law. The decision not to protect the payment system from this misguided state law is a serious error that will unleash chaos and confusion on Illinois consumers and businesses. We cannot let that stand. 

“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 fight over IFPA and any similar proposal will continue." 

The plaintiffs intend to file an appeal with the 7th Circuit Court of Appeals. This will be one to watch.