On May 29, 2024, Illinois rocked the payments world by passing the Interchange Fee Prohibition Act (“IFPA”) into law. With an effective date of July 1, 2025, the law would upend the way in which interchange is calculated in the state and, more fundamentally, the way the entire payments ecosystem processes payment-card transactions.
The Bill
The IFPA prohibits issuers, acquirers, processors, and payment card networks from receiving any interchange fee, or charging a merchant any interchange fee, on the tax amount or gratuity in an electronic payment transaction. In other words, although tax and gratuity payments are part of the money that moves through the payments architecture, the service providers who make that possible will not be allowed to charge for it.
The IFPA provides two means of ensuring no interchange fees are assessed on taxes or gratuities. One route is for a merchant to designate taxes and gratuities as such during either the authorization or settlement process — more or less in real time. However, for merchants who do not use real time designation, the law permits a rebate program, in which the merchant can share the data after the transaction in question for period of up to 180 days. Importantly, the IFPA also prohibits the use of payment data for any purpose other than processing the transaction and sets a penalty of $1,000 per violative transaction.
The Backlash
The IFPA caused an immediate uproar in the payments world on a number of fronts. One purely practical concern is that the technological infrastructure necessary to comply with the IFPA by and large does not exist. It would be hugely expensive to build and deploy it across the various service providers necessary to facilitate card transactions, let alone to do so by July 1, 2025. In the face of this level of difficulty and expensive, it is unsurprising that the IFPA was promptly hauled into court.
On August 15, 2024, the Illinois Bankers Association, American Bankers Association, and various other plaintiffs filed suit in federal district court for the Northern District of Illinois, seeking both a declaration that the IFPA was unlawful and an order enjoining it. The complaint is 74 pages long, but the crux of it is that the IFPA would massively disrupt the payments system and is inconsistent with federal laws. The plaintiffs argue that the IFPA is preempted by a number of federal banking statutes, including the Durbin Amendment, which recognizes the ability of banks to charge interchange. The complaint also alleges that the restrictions on the use of payment data would conflict with federal anti-money laundering laws. On September 3, 2024, the court heard preliminary arguments on the motion for an injunction and ordered further briefing. Illinois’ brief opposing the injunction will be due on October 4, 2024, and the plaintiffs will have a chance to file a reply brief by October 11, 2024. Oral argument is set for October 30, 2024. Given the importance of the issue, it seems likely the court will rule on the application for an injunction before yearend.
Not everyone is opposed to the IFPA, however. The Illinois Retail Merchants Association released a survey on September 25, 2024, reporting that 74% of those surveyed supported the IFPA. Other key findings of the survey included that:
86% of voters think it is unfair for “swipe fees” to be assessed on sales taxes that merchants collect for the local government;
82% think it is unfair for “swipe fees” to be charged on tips; and
84% believe that businesses pass on “swipe fees” to customers.
It is unclear whether survey respondents were aware of the practical difficulties they may face if the IFPA goes into effect, including the potential to have to engage in multiple transactions with a cardholder to accomplish a single sale.
Stay Tuned
The pending lawsuit in the Northern District of Illinois will decide the immediate fate of the IFPA, likely within the next 30 to 40 days. AGG will continue to monitor current developments.