Why Every Banker Should Be Watching the Illinois Interchange Lawsuit
By James White, Vice President of Growth and Market Strategy at Engage FI
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Financial institution executives may not have followed the interchange showdown in Illinois, but they should. It could reduce interchange income for institutions across the country.
On February 10, Chief Judge Virginia Kendall issued a split ruling on the Illinois Interchange Fee Prohibition Act (IFPA), a 2024 law that prohibits banks, credit unions, and payment networks from collecting interchange fees on the portion of any transaction attributable to sales taxes, tips, or gratuities. The court upheld the fee ban while permanently blocking a separate data usage limitation clause.
The banking trade associations that were plaintiffs in the suit argued the National Bank Act and other federal laws preempt the IFPA, calling the decision “a serious error.” Various publications labeled the decision a half-win. (Preemption is generally applied when a state law makes it impossible to comply with both a federal and state law, or when a state law frustrates the accomplishment of the federal law’s objectives.)
Need to Know:
- Illinois’ swipe-fee law may be partially blocked for national banks and federal savings associations, but the litigation keeps uncertainty high and the broader policy fight is spreading beyond one state.
- Bank leaders should treat this as more than a legal headline, because similar legislation could pressure interchange revenue, card program economics, and vendor relationships well beyond Illinois.
- Executives must prepare to ask an uncomfortable question: If our institution operated in a state with an IFPA-style law, what impact would that have on interchange revenue? And what would the organization do about it?
Here is the problem with half a win: the “half” lost may seriously disrupt revenue, processing costs, and the entire interchange margin calculation. For community banks and credit unions already operating on compressed margins, that’s a direct hit to the interchange income that funds fraud detection, rewards programs, and in some cases, basic operational viability. The political argument behind IFPA also is not staying put in Illinois.
IFPA Is Cleverer Than It Looks
The IFPA was built around two of the most politically charged line items on any receipt: Taxes and tips. It’s not easy for a banker to defend a surcharge on a waiter’s gratuity. In the court of public opinion, the optics favor IFPA, even if the legal arguments are too complex for the everyday person to follow.
The court’s reasoning centered on what Judge Kendall called the “core snag” in the banking industry’s preemption argument: Visa and Mastercard set interchange rates, not individual banks. The IFPA, in her view, does not directly regulate national banks’ federal powers. Therefore, it stands.
If her decision stands, it could change the economics of interchange for banks and credit unions in many states, potentially fueling legislative pushes for IFPA-style laws elsewhere.
The Snag in Judge Kendall’s ‘Core Snag’
Judge Kendall’s word choice is ironic: The “core snag” in her decision is that the payment system is an ecosystem, and core banking systems sit at its center. Payment processing and card networks are not fully independent of the institutions that participate in them.
When the system requires new software to isolate tax and tip components at authorization or settlement, it is the payment networks and card processors that must engineer that solution. But those costs do not stay with the networks. They flow downstream, increasing processing costs for the banks and credit unions that depend on them. Saying the law does not regulate banks because Visa sets the rates is like saying a road weight limit does not affect trucking companies because the state writes the rules.
A coalition including the Illinois Bankers Association, the American Bankers Association, America’s Credit Unions, and the Illinois Credit Union League has formally appealed to the Seventh Circuit, seeking expedited review given the July 1, 2026, compliance deadline. There is a strategic constraint worth noting: publicly detailing the full scope of compliance complexity while the appeal is active could undermine the case. Arguing that the IFPA is operationally unworkable concedes that the law has real operational reach, which runs directly counter to the preemption argument.
Policy momentum is harder to appeal than a court order.
The Revenue Reality Hiding in Plain Sight
Community banks and credit unions will likely absorb the greatest share of costs. Consider a $50 restaurant tab in Chicago: with $5.13 in state and local taxes and an $8 tip, roughly 26% of the transaction value is removed from the interchange calculation before any fees are assessed. Multiply that across high-volume, tip-heavy merchant categories, and the compression becomes material quickly.
For smaller institutions where interchange income represents 20 to 30% of noninterest revenue, there is no scale to absorb it quietly.
When revenue shrinks, costs shift elsewhere in the banking offering: higher account fees, reduced rewards, tighter credit availability, and lower investment in the digital tools needed to compete with fintech challengers. Merchants will see real relief. But costs do not evaporate from the system. They redistribute. The consumer-protection argument depends entirely on who ultimately bears those costs.
A State-by-State Battle Is Brewing
The industry filed its appeal on February 13. Legislation mirroring the IFPA was introduced in Georgia six days later. Kentucky is actively considering similar language. California is expected to introduce comparable legislation within weeks. In Wisconsin, a merchant coalition has already distributed a memorandum to every state legislator, applauding the Illinois ruling and outlining 20 questions lawmakers should pose to the financial services industry.
The appeal is not yet briefed. Oral arguments have not been scheduled. And four state legislatures are already stirring with the public policy version of the IFPA.
Each state law will carry its own definitions, timelines, exemption categories, and enforcement mechanisms. What that produces is not reform; in fact, it may be even worse than a top-down law on interchange from Washington, D.C. It is fragmentation.
The U.S. payments system’s greatest competitive asset has always been its consistency. A patchwork of state-level interchange carve-outs introduces complexity that the system was never designed to absorb. The Credit Card Competition Act may simultaneously add federal pressure from above, squeezing payment networks from every direction.
Courts move on legal questions. Legislatures move on political ones. The political movement may turn any court victory into only a brief interlude.
How Institutions Respond in States with IFPA-like Laws
Waiting for a circuit court decision is not a strategy. Any institution with exposure in these states should be modeling the revenue impact of an IFPA-compliant environment now. Know what your interchange income looks like when tax and tip components are carved out. Know your number before a regulator or legislator forces you to find it.
The Wisconsin merchant memo deserves particular attention. A coalition organizing 20 pointed questions for state legislators is not a spontaneous response to a court ruling. It is a coordinated playbook being handed to policymakers who may know very little about interchange economics but understand constituent pressure perfectly well. The industry’s response to that playbook cannot be a legal brief. It has to be a story told in plain language, in public, before those 20 questions become 20 talking points in a committee hearing.
Georgia, Kentucky, California, and Wisconsin are not watching Illinois. There is both a desire to copy it and a coordinated push to convince them to do so. The institutions that model their exposure can face those hearings with answers. Those waiting for Chicago to resolve it may find that the rest of the country did not wait.
