The drama over debit and credit card payments in Illinois got a little hotter last month when Sen. Dick Durbin (D-IL) issued a press release in support of the controversial Illinois Interchange Fee Prohibition Act. This is the state law passed late last spring that prevents issuers from charging interchange fees on the collection of taxes and gratuities. The law becomes effective July 1, 2025, and anyone who collects interchange on tax and tip payments will be subject to fines of up to $1,000 per transaction.
The Illinois Bankers Association, the American Bankers Association and others have filed suit in Federal district court to get the law overturned. The Office of the Comptroller of the Currency also filed an amicus brief claiming preemption exempts national banks from this type of state law.
This law, if allowed to take effect, would be incredibly expensive to implement. There is no current system for segregating a portion of a bill for the purposes of assessing interchange. The law says a merchant can distinguish the tax and tip portion of the bill to settle at the point of purchase, or the merchant can submit to the card issuer proof of transaction within 180 days seeking a rebate for any interchange that applied to taxes or tips. The law doesn’t specify the documentation that would be needed to make such a claim.
Ironically, the Durbin Amendment to the Dodd-Frank Act recognizes the ability of banks to charge interchange fees. Now, Sen. Durbin claims in his amicus brief that the Illinois law is consistent with the intent of the Durbin Amendment in that it protects against “excessive and anti-competitive fees.”
This is something banking industry advocates are watching closely. If this law is established in Illinois, it will spread as copy-cat lawmakers adopt it for their states. It seems that the OCC preemption concern will be enough to stop this, but bankers should continue to make the case that it will be prohibitively expensive to implement the needed software system-wide to operationalize the demands of the IFPA. Those costs certainly would be passed along to consumers in one form or another, which would negate any savings resulting from the IFPA for years.
Public policy aficionados seem unduly focused on tips, as of late. Not only does the state of Illinois want to spare consumers from paying interchange on tips even when they choose to pay with plastic, both candidates for president say they want to exempt tips from income taxes. I am not sure whether that’s a good idea or not. But if tip income is exempted from taxation, I am sure you will see tip income rise to an all time high. An economist who presented at a recent banking industry seminar I attended, acknowledging the recent veneration of tip income, said in the future when he speaks at conferences he is likely to forgo his fee in exchange for a large tip!
