‘Credit card chaos’? Financial institutions bet big on repeal of first-of-its-kind Illinois law

“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If it’s not repealed?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While the financial institutions are quick to cite a list of things that could hypothetically happen if the law isn’t repealed, it’s harder to pin down what’s being done and by who to comply with the law two years after it was signed.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.

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.

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This story was originally published by Capitol News Illinois and distributed through a partnership with The Associated Press.