Industry Groups Contest Illinois Fee Prohibition Act

On August 15, 2024, a significant legal challenge was initiated by the Illinois Bankers Association, American Bankers Association, America’s Credit Unions, and Illinois Credit Union League. They filed a complaint for declaratory and injunctive relief against the Illinois Attorney General challenging the enactment of the Interchange Fee Prohibition Act (IFPA). This legislation is viewed by many in the financial industry as a disruptive force that could bring about operational havoc.

Legislative Background

The controversial Illinois Interchange Fee Prohibition Act (IFPA), signed into law by Governor J.B. Pritzker on June 7, 2024, is set to take effect on July 1, 2025. The act specifically prohibits the collection of debit and credit card interchange fees on transactions that include taxes and gratuities under certain conditions. Here are the key aspects of this law:

Firstly, merchants are required to notify the acquiring banks of the tax and gratuity amounts, either at the time of transaction authorization or during settlement. Additionally, all entities, except for the merchant, are prohibited from using transaction data for any purpose other than facilitating or processing the transaction, or as legally required. Furthermore, violations of these provisions result in a civil penalty of $1,000 per transaction. Consequently, banks must refund any interchange fees collected on these portions of transactions.

Economic and Operational Implications

Randy Hultgren, President and CEO of the Illinois Bankers Association, warned of the economic repercussions. “Left unchecked, the IFPA will wreak havoc at the register every time people use their credit or debit card in Illinois, creating confusion for consumers and higher costs for small businesses and banks in our state,” he explained. He emphasized that the law would not only cause confusion but also increase operational costs, impacting consumer satisfaction and complicating business operations.

Additionally, the complexity and expense of implementing these changes are substantial. For instance, one member of the plaintiffs’ group anticipates needing to invest upwards of $10 million to comply with the new requirements. These figures underscore the significant financial burden and operational complexity anticipated because of the IFPA.

Legal Arguments Against the IFPA

The plaintiffs present several key legal challenges against the IFPA:

• Preemption by National Bank Act (NBA): The IFPA is argued to interfere significantly with the powers of national banks, thus being preempted by the NBA.
• Home Owners’ Loan Act (HOLA) Challenges: Similar to the NBA, the IFPA is claimed to interfere with the powers granted to federal savings associations under HOLA.
• Conflict with Federal Credit Union Act (FCUA): The act is said to conflict with the FCUA, which preempts state laws that limit the powers of federal credit unions.
• Violations of the Durbin Amendment to the Electronic Fund Transfer Act: The IFPA conflicts with federal regulations concerning interchange transaction fees, which do not exclude taxes and gratuities from the transaction amount.

Broader Impact and Industry Response

The filing of this lawsuit by such prominent associations underscores a collective industry response. It aims at defending not only the financial ecosystem but also the rights of consumers and small businesses. The plaintiffs argue that without injunctive relief, the IFPA will impose significant, irrecoverable costs and operational chaos across the state’s financial systems. This legal action seeks to ensure that the financial operations continue to function smoothly without the disruption proposed by the IFPA.

Furthermore, this case might set a precedent for how interchange fees are regulated, not just in Illinois but across the entire United States. As such, the outcome of this lawsuit holds substantial implications for national economic policies concerning financial transaction regulations.

Conclusion

This legal challenge to the IFPA underscores a pivotal clash between state legislation and national financial regulation. As the banking and credit union groups stand united against the IFPA, the industry at large remains vigilant. Additionally, the potential impacts of this legislation extend beyond mere compliance costs. They threaten the stability and efficiency of financial transactions nationwide. Therefore, the court’s decisions in the coming months are eagerly anticipated because they will determine the operational landscape for countless financial institutions.