CHICAGO — Illinois will appeal a federal court ruling that prevents the state from enforcing its controversial ban on interchange fees charged on the sales tax and gratuity portions of credit and debit card transactions, setting up another round of litigation over a law strongly opposed by credit unions, banks and payment networks.
Illinois Attorney General Kwame Raoul, a Democrat, disclosed the state’s intention to appeal in a court filing Friday (Oct. 9), according to Bloomberg Law. The appeal will challenge a ruling that prohibits enforcement of the Illinois Interchange Fee Prohibition Act (IFPA) against national banks, certain out-of-state state-chartered banks, federal savings associations, payment card networks and federal credit unions.
The development follows a Sept. 22 decision by U.S. District Judge Virginia M. Kendall of the Northern District of Illinois granting a permanent injunction that extended protections under the ruling to federal credit unions.
A stipulated final judgment entered Sept. 22 cleared the way for the state to pursue its appeal, Bloomberg Law reported.
Federal Credit Unions Win Protection
The September ruling represented a significant victory for credit unions that have challenged the Illinois law since its enactment in 2024.
Kendall’s decision followed action by the National Credit Union Administration, which issued an interim final rule in June clarifying that federal credit unions have authority under federal law to charge noninterest fees, including interchange fees associated with credit and debit card transactions.
The NCUA rule also established that federal credit unions’ authority extends to fees established or collected through payment networks and other third parties.
In her Sept. 22 opinion, Kendall concluded the Illinois restrictions conflicted with federally authorized credit union powers, bringing federal credit unions under the same protections previously granted to other federally regulated financial institutions.
The court’s permanent injunction applies to:
- Federal credit unions.
- National banks.
- Certain out-of-state state-chartered banks covered by the Riegle-Neal Interstate Banking and Branching Efficiency Act.
- Federal savings associations.
- Payment card networks.
The injunction does not provide the same blanket protection to Illinois state-chartered credit unions.
Credit Union Groups Welcome Ruling
America’s Credit Unions and the Illinois Credit Union League, both participants in the legal challenge, welcomed the September decision.
“This ruling validates the unified efforts of the credit union industry by confirming that federal credit unions are exempted from the IFPA’s interchange fee prohibition,” America’s Credit Unions President and CEO Scott Simpson said following the decision.
Simpson said the association and its partners would continue their efforts to secure protections for all credit unions, including those operating under state charters.
The association has argued the Illinois law would disrupt the payments system and interfere with financial institutions’ ability to provide affordable financial services.
America’s Credit Unions previously acknowledged that the litigation could ultimately reach the U.S. Supreme Court.
What the Illinois Law Would Do
Enacted in 2024, the Illinois Interchange Fee Prohibition Act seeks to prohibit financial institutions and payment networks from charging or collecting interchange fees on the portions of electronic transactions attributable to state and local sales taxes and gratuities.
Interchange fees, commonly called swipe fees, are generally paid by merchants when consumers use credit or debit cards. The fees help compensate card issuers for processing transactions and providing payment services.
The Illinois legislation also includes restrictions on the use of certain payment transaction data.
As the CU Daily has reported, supporters of the law have sought to reduce merchants’ payment-processing expenses, arguing businesses should not have to pay interchange fees on money collected for taxes or tips.
Financial institutions and payment networks have challenged the restrictions, contending that federal banking laws preempt the state requirements and that implementing the law would interfere with established electronic payment systems.
The Office of the Comptroller of the Currency also intervened in the dispute through regulatory action in April, determining that federal law preempts the Illinois restrictions as applied to national banks and federal savings associations.
Appeal Could Have National Implications
Illinois’ decision to appeal means the dispute over the state’s authority to regulate interchange fees will continue before the 7th U.S. Circuit Court of Appeals.
The case has attracted national attention because the Illinois legislation represents an effort by a state to restrict interchange fees on portions of payment card transactions.
For credit unions, the outcome could have implications beyond Illinois, particularly if other states pursue similar restrictions.
Although federal credit unions are currently protected by the permanent injunction, the state’s appeal creates the possibility that those protections could be reconsidered.
The September ruling remains an important legal victory for federally chartered credit unions, while the broader question of how far states can go in regulating interchange fees remains unresolved.
