On May 8th, the U.S. Court of Appeals for the Seventh Circuit vacated a February 2026 District Court ruling which upheld part of the Illinois Interchange Fee Prohibition Act (IFPA), sending the case back to the U.S. District Court for the Northern District of Illinois. The Appeals Court's action follows the issuing of an amicus brief by the Office of the Comptroller of the Currency (OCC) in March, and the issuing of an OCC interim final rule and OCC final order in April, establishing that federal law preempts key provisions of the IFPA with respect to national banks and federal savings associations. The OCC interim rule and interim order will be addressed when litigants resume arguments in the lower court.
The IFPA has been ensnared in litigation since it was passed in May 2024. On February 10th, District Judge Virginia Kendall of the Northern District of Illinois upheld the part of the IFPA prohibiting the collection of interchange fees on sales taxes, excise taxes, and tips. She wrote that the decision regarding interchange fees was a "close case" because the interchange fee provision of the IFPA does not directly regulate banks as the card networks (i.e., Visa and Mastercard) set interchange fees. However, the Judge struck down the part of the law that prohibits entities other than merchants from transferring or using data from a transaction except to facilitate or process the transaction. The plaintiffs in the case subsequently appealed Judge Kendall's ruling to the Seventh Circuit which approved their motion for an expedited appeal.
The OCC's interim final rule clarifies the longstanding powers under federal law for national banks to charge certain fees, regardless of whether those fees are set by the bank or a third party. According to the OCC, the IFPA is preempted by the National Bank Act with respect to national banks, and the Home Owners' Loan Act of 1933 (HOLA) with respect to Federal Savings Associations. Furthermore, the OCC asserts that the IFPA runs afoul of the Supremacy Clause of the U.S. Constitution and is therefore preempted. The OCC's interim final order "confirms that Federal law preempts the IFPA, expressly providing that national banks and Federal savings associations are neither subject to nor required to comply with this State law".
The OCC also stated that if the IFPA takes effect it will "create a complex, potentially unworkable, and destabilizing standard for national banks, Federal savings associations, and the nation's payment card systems. Further, such effects could be exacerbated to the extent other states impose similarly unworkable or conflicting standards." The interim rule goes into effect June 30th, one day before the IFPA is scheduled to take effect.
As Credit Unions are not regulated by the OCC, industry representatives have requested that National Credit Union Administration (NCUA) provide guidance and issue a similar preemption statement for credit unions.
The litigants have conveyed that they look forward to resuming arguments in the District Court. The Illinois Bankers Association, American Bankers Association, America's Credit Unions, and Illinois Credit Union League, the plaintiffs, along with the OCC, argue the law should be struck down, while the Illinois Attorney General's office asserts that the interim final order by the OCC preempting the law was invalid due to procedural flaws and did not affect the merits of the case.
On May 7th, the day before the U.S. Seventh Circuit sent the case back to the District Court, the Colorado House, following the actions of the Colorado Senate a week earlier, passed a bill to eliminate interchange fees on sales tax. The bill is now with the governor for review. The Colorado bill applies to banks with $60 billion or more in assets and will not take effect until January 1, 2028 at the earliest unless voters determine otherwise via a referendum. It is not clear what impact the new developments regarding the IFPA will have on this legislation.
Verisave's Take:
As Verisave predicted previously, this battle will continue for some time and Verisave expects the IFPA, currently scheduled to go into effect July 1, 2026, will be put on hold until litigation is resolved. Despite the OCC's interim order, the final decision rests with the courts and whatever the next ruling by the district court may be, it will surely be appealed by the losing side. The stakes are very high for both sides, which means neither will capitulate easily. Merchant groups see the IFPA as a model that can be extended to other states in their long running battle to reduce interchange fees. Payments system representatives and the OCC see it as a dangerous violation of existing laws and federal powers that will undermine the smooth functioning of the payments system. It is clear that the IFPA has emboldened other states to take similar action as demonstrated by Colorado's recent actions, which makes it even more critical to expeditiously resolve the issues raised by the IFPA. Even if you don't live in Illinois, keep an eye on this one – the outcome will have significant implications for the U.S. payments system.
