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A Remarkable Month for Interchange – But What Has Really Changed?

There’s no shortage of angles on interchange worth decomposing. The topic has been a perpetual moving target for the past few years. With the dust having apparently settled momentarily, let’s dive into some rather remarkable events that have occurred over May and June alone.

Illinois’ Interchange Fee Prohibition Act (IFPA) qualifies as the “identified patient” here, to borrow a family therapy term- and I think we could all use some therapy at this point. The IFPA prohibits the charging of interchange on the tax and gratuity components of a card transaction. We’ve been reporting on the flaws of this legislation for nearly two years. The Illinois legislature recently delayed the law’s effective date to July 1, 2027- the second year-long extension they’ve imposed, presumably as reality sets in that the law is un-implementable.

At this point lawmakers are probably wishing the issue would quietly go away. A series of court rulings have been largely sympathetic to the state’s position, even while narrowing its reach. But in late April the OCC weighed in, issuing interim final orders asserting federal law’s overriding authority to regulate non-interest banking fees. The NCUA quickly followed suit, and the Circuit Court promptly vacated its February decision supporting Illinois’ law.

Absent further developments, enforcement of the law would apply solely to state-chartered bank chartered banks and credit unions, making it virtually useless and even more complex to administer.

While all this was unfolding, the Colorado legislature saw fit to pass its own variation of the bill. This one addressed only the tax component of a payment, and added the bizarre provision that any merchant with more than 500 employees “apply any savings resulting from the bill to reducing prices for consumers or investing in employee wages or benefits.” It’s a nice idea in principle; good luck measuring or enforcing it.

Colorado Governor Jared Polis, presumably monitoring Illinois’ proceedings, invoked his authority to veto the bill on June 3. Polis’ letter to the State Senate does a fine job summarizing the situation, including the sage observation “it is questionable whether this bill is fully implementable or operationally feasible.” Amazingly, an Illinois lawmaker was quoted expressing similar concerns in 2024- immediately after voting in favor of the IFPA.  

Given the circumstances, one might reasonably conclude the wave of state initiatives has run its course. Unfortunately, it appears some legislatures haven’t gotten the memo. Just this week the Defense Credit Union Council was in Massachusetts testifying against yet another proposed bill to prohibit assessing interchange on the tax and gratuity portions of a card transaction. Its sponsors claim the bill would- you guessed it- “save small businesses and consumers money.”

One week later, a federal court approved a proposed settlement between Visa/Mastercard and merchant groups that has dragged on for… (checks watch)… 21 years. The news was positively received in many circles- V and MA stock both rose on the news- but allow me to leave my party hat on the rack. We’ve been down this path before, multiple times. Earlier “proposed settlements” have been rejected by subsequent judges (most recently in 2024), and merchants have already lined up to object to this one in the forthcoming comment period.

Merchants voiced displeasure before approval of the settlement, but the judge astutely stated, “None of the objectors have persuaded the Court that they will, or even can, get more through trial.” Which returns us to a core issue- this is a dispute better suited for private negotiation- for which merchants continue to gain new leverage- or federal legislation. Card issuers may not like the result of a resulting federal law, but it would at least impose a single standard to manage, and hopefully foster a more considered assessment of the details.

EPILOGUE- For good measure, Louisiana entered the fray with a quirky twist focused solely on debit cards. Effective August 1 of this year, surcharging on debit card transactions in the Pelican State will be prohibited– a remarkably quick turnaround for a law signed on June 2. On one level, this restriction is more defensible than interchange-focused efforts. Most critically, it does not require intricate changes to network systems. However, the Durbin Amendment supposedly already achieved the goal of slashing debit acceptance cost. So why are still seeking savings?

In a perverse way, Louisiana’s law could provide a benefit in waking up merchants to an overlooked reality that muddles the entire interchange debate. I’d bet most merchants (or at least their front line staff) don’t notice whether a customer has presented a debit or credit card. The interchange fees imposed by Visa/Mastercard on these are very different; to an SMB they look the same, however, because middleman processors charge a blended rate in the name of simplicity. Perhaps the education required to discern between these card types, and the reasons for doing so, will drive a constructive shift in the dynamics of this endless battle.     

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