Governments charge fees for everything. Want to register a vehicle? Pay the DMV. Want to file a civil law case? Fork over some cash. Need a new copy of your birth certificate? There’s a fee for that, too. But for some reason, when private companies charge fees for their services, some politicians start to hyperventilate.
That’s what’s happening with interchange fees—the fees companies like Visa and MasterCard charge to process credit and debit card payments. Politicians at the state and national level have been trying for years to lower the legally allowable fee or even prohibit card companies from charging fees at all.
The most aggressive attempt came courtesy of Illinois, which passed a law in 2024 forbidding interchange fees on the sales tax portion of a transaction. Marketed by its supporters as a reasonable reform, the Interchange Fee Prohibition Act (IFPA) is a convoluted mess which would make card transactions more complicated without making anyone better off. The statute aims to make the market fairer to small businesses, while saving consumers a little money. While the intentions were good, ultimately, the law would introduce more regulatory ambiguity, make processing card transactions more complicated, and increase compliance costs. Federal and state legislators should be weary of copying Illinois’s interchange fee law.
The law has not even gone into effect yet and it has already proven to be a legal nightmare. On June 1, a US District Court expanded an earlier injunction against the interchange fee law, concluding that, since federal law allows banks to receive interchange fees, the state does not have the constitutional authority to overrule it.
The last major interchange fee reform occurred in 2010 with the Dodd-Frank Wall Street Reform and Consumer Protection Act, when the federal government capped them at roughly 22 cents per transaction. This was an extreme price ceiling. The typical interchange fee at the time was double what the new statute allowed companies to charge.
Despite this radical change, the controversy over swipe fees gained new life when inflation ramped up in 2022, as politicians looked for something to blame besides the government’s expansionary monetary and fiscal policies. New federal legislation—the Credit Card Competition Act—has stalled for the time being, but state efforts like those in Illinois have been growing in popularity.
The arguments in favor of the Illinois statute look fair at first glance. At present, merchants bear the full cost of collecting sales taxes. They have to ensure their payment processing systems accurately calculate the taxes, place the tax revenue in a separate account, and transfer it to the government. This takes time and effort, adding to the cost of business. On top of that, merchants also pay interchange fees to banks and card servicers for the privilege of collecting the government’s tax revenue. Big banks and payment networks like Visa and MasterCard reap the profits and merchants are left holding the bag.
Illinois lawmakers vowed to right this wrong by prohibiting card companies from charging swipe fees on the collection of sales taxes. Setting aside the issue of whether the state law unconstitutionally preempts federal law, the statute is tough to defend on its merits. If put into effect, it would require merchants and card servicers to reconfigure their payment processing systems, ensuring swipe fees are only charged on the sale of the product or service, but not on the state sales tax portion.
As complicated as the Illinois law is, other states tried to go even further. A similar Colorado bill passed by its legislature earlier this year would’ve forced merchants to pass the savings to consumers in the form of lower prices. (The bill’s authors must have known that when interchange fees are capped, research shows merchants often don’t pass the savings to their customers).
If enacted, the Colorado bill would have eliminated the 2 percent interchange fee on the average 8 percent sales tax charge, causing prices to plunge a mere 0.16 percent, saving the average family about $30 per year. Governor Jared Polis realized the bill would create a legal quagmire like Illinois’ and vetoed it.
Thus far, schemes at the state level to limit interchange fees have been needlessly complex, costly, and legally dubious. Swipe fee prohibitions play well with the public. They offer big, greedy boogeymen in the form of banks and credit card companies whom we can blame for high grocery prices. In reality, the issue distracts lawmakers from more sensible policies that would yield much more significant benefits to small businesses and consumers.
States looking to offer economic relief to small businesses can start by freezing minimum wage increases, lowering taxes, and offering “vendor discounts”—an arrangement allowing merchants to keep a portion of the sales tax as compensation for their tax collection services. Congress can help by repealing the president’s unilateral tariffs and eliminating costly regulations. Any one of these policies would do more to improve small businesses’ bottom lines than going after card servicers.
The Illinois interchange debacle should stand as a lesson that policymakers can best serve their constituents by focusing their energies on real solutions, not going after boogeymen.
