On February 10th, a federal judge upheld part of the Illinois Interchange Fee Prohibition Act (IFPA).
Ruling on a request, by bank and credit union trade groups, for a permanent injunction, 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. However, 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 was struck down. On March 3rd, the plaintiffs were granted an expedited appeal by the Seventh District of the Federal Court of Appeals.
Judge Kendall wrote that the decision 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. She found this was the "core snag" in the plaintiffs' argument that the National Bank Act preempts the IFPA.
The judge struck down the IFPA's data usage limitation provision finding that it constrained national banks' broad federal power to engage in data processing for activities such as fraud monitoring and loyalty programs.
The ruling was somewhat surprising as the judge previously issued a preliminary injunction in 2024, which she later expanded, in favor of the plaintiffs suing to block the law. At that time, she found they had a high likelihood of success proving their claims that the IFPA interferes with the National Banking Act, the Homeowners' Loan Act and the Riegle-Neal Interstate Banking and Branching Efficiency Act. The preliminary injunction covered chartered banks, federal savings associations, and out-of-state banks doing business in Illinois, making about 90% of card transactions exempt from the IFPA, according to the Electronic Transactions Association.
In response to the ruling, the plaintiffs in the case, the Illinois Bankers Association, American Bankers Association, America's Credit Unions, and Illinois Credit Union League, filed an appeal with the Seventh District of the Court of Appeals seeking a declaratory judgment that the IFPA is contrary to federal law, as well as an injunction prohibiting state officials from applying or enforcing it. On March 3rd, the Seventh District approved their motion for an expedited appeal before the law goes into effect July 1st. The plaintiffs and their supporters also continue to urge Illinois legislators to repeal the law.
Verisave's Take:
While merchants may have largely won this round, the battle is far from over. The stakes are high for both sides, which means continued appeals are likely as neither side will be inclined to back down. The IFPA is particularly important to merchant groups who see it as a model that can be extended to other states in their long running battle to reduce interchange fees. On the other side, payments system representatives are highly motivated to continue their opposition to the law because, in their view, it violates federally authorized powers and will lead to a patchwork of state laws that will fragment the nationwide payments system, undermining its ability to function effectively and driving up costs. The fact that the Judge said in her ruling that it is a "close case" likely gives them hope that their appeal can ultimately prevail. Even if you don't live in Illinois, this is a case to watch as it has national implications.
