Interchange Fees Preemption: Federal Court Sends Illinois Law Back for Review

A federal appellate panel paused Illinois’ curb on card-swipe charges tied to sales taxes and tips, sending the dispute back to the trial court in light of a fresh preemption move by the federal banking regulator. For now, the IFPA’s limits are not being enforced while the district court takes up the remand.

Case Snapshot

• On Friday, the Seventh Circuit set aside and remanded Illinois’ prohibition on charging interchange on tax and gratuity portions, citing the Office of the Comptroller of the Currency’s recent preemption action under the Trump administration as a reason for renewed proceedings in district court.
• The Illinois Attorney General argued that the OCC’s recent interim final ruling attempting to preempt the state law is procedurally defective and irrelevant to the underlying merits. By contrast, bank and credit union plaintiffs, aligned with the OCC, urged the appellate court to invalidate the measure based on the regulator’s step. They have also argued that the IFPA itself impermissibly restricts bank-related fee revenue and forces changes to card-transaction processing that, in their view, conflict with federal banking powers.
• The appellate order instructed the district court to address these issues first and canceled oral argument previously slated for May 13.

Insight and Context: Preemption and the IFPA

Four trade associations representing banks and credit unions sued Illinois in August 2024 over the state’s Interchange Fee Prohibition Act (IFPA), enacted two months after Gov. JB Pritzker signed it. The IFPA is an Illinois statute aimed at reducing card-swipe costs by barring the collection of interchange on the portions of a credit or debit card transaction attributable to sales taxes and gratuities. Under the IFPA, the restriction is limited to interchange on those tax-and-tip amounts; it is not a blanket rule making it illegal in Illinois to charge a fee on a debit card transaction generally. In February, U.S. District Judge Virginia Kendall in Chicago upheld the law’s core provision, finding it neither directly regulates banks nor conflicts with federal banking law.

The measure was scheduled to take effect on July 1 following its 2024 enactment, but it has been paused as the case returns to the district court for further review.

Last month, the Office of the Comptroller of the Currency amended a rule clarifying that national banks may receive interchange through intermediaries, partners, payment networks, interchanges, or other third parties. Interchange is typically received by the card-issuing bank or credit union, with the fee generally routed through payment networks and other processors or intermediaries as part of the transaction flow.

Scott Talbott, executive vice president at the Electronic Transactions Association, said the ruling underscores the strength of the OCC’s position that the National Bank Act preempts the state law.

Illinois Retail Merchants Association CEO Rob Karr characterized the outcome as routine given what he described as card companies introducing a new argument at the appellate stage.

Karr added that the association is ready to address the new preemption issue in the lower federal court.

Representatives for the Illinois Bankers Association and the American Bankers Association, both plaintiffs, did not immediately provide comment on Friday.

Illinois was the first state to adopt a curb of this kind, which spurred copycat proposals elsewhere as lawmakers sought to restrain card-swipe costs.

• Restaurant groups backed the law as a way to limit the fees their members pay when consumers use a card.
• Retail groups backed the law as a way to limit the fees their members pay when consumers use a card.

From an operational and financial perspective, the IFPA would generally reduce the interchange assessed on tax and gratuity amounts, which merchants say can lower total acceptance costs on certain purchases. Banks and payment-system participants have said separating those components can require changes to transaction data and processing, and they have warned that reduced interchange revenue could lead to shifts in pricing, rewards, or other account terms.

Separately this week, the Colorado General Assembly advanced a comparable bill. The House followed earlier Senate action to bar charging interchange on sales taxes when purchases are made with a credit or debit card.

The Colorado proposal now awaits action by Gov. Jared Polis, who has not announced his plans.

A central unresolved issue in these efforts is whether the National Bank Act displaces state-level limits like the IFPA. If courts ultimately uphold laws like the IFPA, merchants could see reduced interchange on tax-and-tip amounts, while banks and networks may face revenue and processing impacts that could ripple into consumer-facing products. If such laws are struck down, merchant-backed state efforts to limit interchange in this way could be curtailed, leaving existing fee structures largely intact.

The remand shifts the fight to how far federal banking law reaches into state attempts to reshape payment-fee economics, and whichever side loses in district court is likely to seek another appellate ruling.

In a filing last week, Illinois officials contended the OCC failed to comply with the Administrative Procedure Act, rendering the agency’s rule change and preemption directive invalid.

In a separate brief filed Wednesday, a merchant coalition supporting the state law argued the OCC’s preemption step and rule amendment are substantively flawed, relying on arbitrary and capricious reasoning.

The merchants’ lawyers added that the agency adopted the banks’ arguments in this case while disregarding points advanced by the Attorney General and supporting amici.

Doug Kantor, general counsel for the National Association of Convenience Stores, said the OCC has taken extraordinary measures to avoid having the courts resolve the matter through the normal process.

Kantor, who serves on the Merchants Payments Coalition’s executive committee, also criticized the OCC as acting more like an advocate for banks than a regulator.