A State of Confusion- Interchange Battles Move Closer to Home

The tension between federal and state-level banking legislation is a never-ending source of heartburn. Businesses naturally crave less regulation, in order to limit compliance costs and avoid barriers to innovation. Given the choice, however, they’d nearly always prefer a single federal standard to a patchwork of state edicts that can make compliance difficult-verging-on-impossible.

It’s also far easier to monitor and rebut emerging legislation at a centralized level- see the Credit Card Competition Act. While lobbyists have been waging battle over this bill’s merits in Washington, card issuers of all shapes and sizes got an unexpected 2×4 to the side of the head from Illinois lawmakers.

The Interchange Fee Prohibition Act, signed into law by Illinois Governor J.B. Pritzker, forbids the assessment of interchange on the portion of a debit or credit card purchase related to state taxes and gratuities. This carve out has been a Holy Grail for retail trade groups for years, and has been repeatedly batted back once card issuers were able to explain its infeasibility. Until now.

Despite the best efforts of groups like the Illinois Credit Union League (ICUL) and Illinois Bankers Association (IBA), the provision was added at the last minute to a must-pass state budget bill to placate retailer lobbyists enraged by the budget’s removal of another retailer tax break. Notably, this interchange maneuver doesn’t affect state tax inflows- it’s a pure transfer from banks and credit unions to retailers (primarily large chains- small business are unlikely to see much if any benefit, for reasons we’ll explain another time).

The Act reveals a lack of understanding of payment card mechanics. Cards networks would need to re-program systems to identify and segregate certain portions of each bill (for the benefit of one state?) Processors will have to push software updates to merchants, and many businesses will likely need to swap out terminals- all by July 2025, when the law is slated to take effect.

The ICUL and IBA also rightly pointed out the law raises data privacy concerns, as it literally calls on processors to “look inside” individual transactions to parse out specific line items. Worse yet, attempts to somehow restrict use of that data could have the unintended effect of banning existing industry fraud-fighting efforts.

Crain’s Chicago Business- which published an editorial challenging the wisdom of the Act- quoted a lawmaker who questioned whether the Act was “operable”- then amazingly proceeded to vote in favor of it anyway.

Emboldened by its Illinois breakthrough, retailer lobbyists are now pushing a similar bill in Pennsylvania’s legislature. This version appears to leave out gratuities, focusing solely on interchange on state taxes. On the surface this would seem to make the bill less onerous for card issuers. In reality it’s a textbook example of the drawbacks of addressing such issues on a state level. While triggering the same operational issues, Pennsylvania’s proposed law would create additional complexities by requiring networks to program another set of state-specific rules.

In yet another twist, after declining to vote on a similar bill the Florida legislature added state budget funding for a study of the impact of credit card fees, potentially teeing up the matter for future action. Governor Ron DeSantis rejected the move with an unusual line item veto. In the process, however, he also removed funding for several “ordinary course of business” studies that in prior years have passed without issue. The ball is back in the Legislature’s court to clean up the mess.

Hopefully common sense will prevail before Illinois’ law takes effect next summer, once payments experts are given the opportunity to educate lawmakers. Unfortunately, don’t be surprised if more states take a few misguided steps down the same path before then.