Visa, Mastercard, and American Express Face Legal Setback as Judge Upholds Illinois Law on Credit Card Fee and Data Restrictions
ABSTRACT: A recent ruling in the U.S District Court for Northern District of Illinois Eastern Division has left major credit card companies like Visa, Mastercard, and American Express reeling after the Court refused to enjoin an Illinois law restricting interchange fees on gratuity, tip, or state and local taxes. The decision marks a significant development in the ongoing battle over credit card fee regulations, potentially reshaping the financial landscape for issuers, banks, businesses, and consumers.
On May 29, 2024, Illinois joined a small minority of jurisdictions that have outlawed credit card surcharges by passing the Interchange Fee Prohibition Act (“IFPA”) into law. 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.
Enforcement and Data Collection
Enforcing the law is accomplished by the merchant designating taxes and gratuities as such during either the authorization or settlement process (which occurs immediately at the point of sale). Merchants unable to designate taxes and gratuities in real time can participate in a rebate program, in which the merchant can share the data after the transaction in question for period of up to 180 days. Additionally, the IFPA prohibits the use of payment data for any purpose other than processing the transaction and sets a penalty of $1,000 per violative transaction.
Subsequent Litigation
On August 15, 2024, the Illinois Bankers Association, American Bankers Association, and other plaintiffs filed suit in the U.S District Court for Northern District of Illinois Eastern Division (Illinois Bankers Association et al. v. Kwame Raou), seeking both a declaration that the IFPA was unlawful and an order enjoining it. The main arguments against implementation of the law are that it will massively disrupt the payments system and is preempted by federal law. The Court issued a 37-page Memorandum Opinion and Order ruling stating the Illinois Bankers “have demonstrated likelihood of success on the merits” that the IFPA is preempted by the National Bank Act (“NBA”) and the Homeowners Credit Loan Act (“HOLA”). Specifically, the Court ruled federal law provides “an express right for national banks to collect non-interest fees“, that IFPA “directly regulates credit and debit card transactions … by “dictating to Issuers how much they may charge for a given transaction” and “alter a bank’s right to determine how best to structure their non-interest fee arrangement with merchants.”
The Court also preempted the IFPA restriction on the use of transaction data for “any purpose other than processing the transaction.” The Court stated limiting the use of transaction data for only processing the transaction contradicts federal law that “explicitly grant[s] national banks the power to provide data processing and transmission services for itself and others, where that data relates to banking, finance, and economics.” Further, the restriction would curtail the use of data for purposes such as “aggregating transaction data to monitor credit card fraud, address payment disputes, and facilitate cardholder loyalty programs.” Although the court ruled the IFPA is preempted from applying to institutions regulated by the NBA and HOLA, it will still apply to credit card companies. The Court states “the preemptive effect of the NBA’s provision of rights to national banks does not extend to other, non-national bank or savings associations participants in credit and debit card transactions, including Card Networks like Visa or Mastercard.”
Although the ruling clearly exempts certain parties in a credit transaction from the law’s application, card issuers are still subject to the law’s restrictions on transaction data and interchange fees. The law goes into effect on July 1, 2025. Interestingly, interchange fees collected are meant to compensate issuers (the cardholders bank) for the risk of non-payment they take on by providing the funds up front each time the cardholder swipes the card. However, transaction data is used by all parties -- issuers, card networks like Visa and Mastercard, merchant banks, and merchants. Further arguments in the case regarding whether the National Credit Union Act preempts IFPA are set for January 15, 2025. We will continue to monitor the case for additional rulings and appeals.

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Baker Sterchi's Financial Services Law Blog explores current events, litigation trends, regulations, and hot topics in the financial services industry. This blog informs readers of issues affecting a wide range of financial services, including mortgage lending, auto finance, and credit card/retail transactions. Learn more about the editor, Megan Stumph-Turner, and our Financial Services practice.
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