On August 15, 2024, a major legal challenge was launched by the Illinois Bankers Association, American Bankers Association, America’s Credit Unions, and Illinois Credit Union League against the Illinois Attorney General. They have filed a complaint seeking both declaratory and injunctive relief concerning the newly enacted Interchange Fee Prohibition Act (IFPA). The financial industry perceives this legislation as potentially disruptive, with fears of significant operational issues.
Legislative Background
Signed into law by Governor J.B. Pritzker on June 7, 2024, the Illinois Interchange Fee Prohibition Act (IFPA) is scheduled to take effect on July 1, 2025. The law specifically bans the collection of debit and credit card interchange fees on transactions involving taxes and gratuities under certain conditions. Key elements of the IFPA include:
- Merchant Notification: Merchants must notify acquiring banks of the tax and gratuity amounts either at transaction authorization or during settlement.
- Data Usage Restrictions: Except for the merchant, no one else is allowed to use transaction data for purposes beyond processing the transaction or as legally required.
- Penalties: A civil penalty of $1,000 per transaction is imposed for violations, and banks must refund any interchange fees collected on these transaction components.
Economic and Operational Impact
Randy Hultgren, President and CEO of the Illinois Bankers Association, has voiced concerns about the economic consequences. He stated that the IFPA could cause significant confusion at checkout, increase costs for small businesses and banks, and disrupt consumer satisfaction. The complexity of implementing these changes is expected to be substantial, with one organization estimating compliance costs of up to $10 million.
Legal Challenges Against the IFPA
The plaintiffs challenge the IFPA on several legal grounds:
- Preemption by the National Bank Act (NBA): They argue that the IFPA interferes with the powers of national banks and is therefore preempted by federal law.
- Home Owners’ Loan Act (HOLA): Similar to the NBA argument, they claim the IFPA interferes with the powers of federal savings associations under HOLA.
- Conflict with the Federal Credit Union Act (FCUA): The plaintiffs assert that the IFPA conflicts with the FCUA, which preempts state laws restricting federal credit unions’ operations.
- Violations of the Durbin Amendment to the Electronic Fund Transfer Act: They argue that the IFPA conflicts with federal rules concerning interchange fees, which do not exempt taxes and gratuities.
Broader Implications and Industry Reaction
The lawsuit, filed by prominent banking and credit union groups, represents a unified industry response to the IFPA. The plaintiffs contend that without injunctive relief, the law will result in substantial, irreparable costs and operational disruptions within the financial system. This case may set a precedent for the regulation of interchange fees, influencing national economic policies and financial transaction regulations.
Conclusion
This legal challenge highlights a significant clash between state and federal financial regulations. As banking and credit union associations stand against the IFPA, the outcome of this lawsuit will be critical in determining the operational landscape for financial institutions. The case will likely have broader implications for how financial transactions are regulated across the country.