How states have become the new center of credit card legislation

In recent years, the federal government has been considering bills that could alter how credit cards work and potentially jeopardize rewards; in particular, the Credit Card Competition Law (CCCA), which has failed to advance as a stand-alone bill or as adherence to other legislation.

While federal efforts have stalled, state governments They are increasingly joining the fight.

Pending the outcome of federal litigation, Illinois could soon be the model for what will happen to consumers when such legislation takes effect.

Here’s what you need to know about how this could negatively impact the way you pay for goods and services.

Some background

First, a quick introduction to the mechanics of a credit card transaction.

Every time you use a card to pay for something online or in a store, the merchant is charged a small percentage of the purchase amount (about 2%) to process that transaction. This is usually known as a merchant discount fee, which is shared between the card-issuing bank (the interchange fee), the credit card payment network (most often Visa, MasterCard either American Express) and the merchant’s processing institution.

These fees are used by all parties to safeguard the purchase, fight fraudcover the cost of loans and fund rewards programs by issuing points, miles or cash back.

As a consumer, you are protected from unauthorized charges and you choose the card (and network) for the purchase. Meanwhile, small businesses enjoy a nearly frictionless transaction process, with minimal risk of loss or theft, a major concern when handling cash transactions.

Unfortunately, one state is moving toward disrupting an important segment of this ecosystem, despite a history of failures in other parts of the country.

Illinois Tax and Tip Law

In 2024, the Illinois state legislature passed the Interchange Fee Prohibition Act, or IFPA. This is scheduled to go into effect on July 1, 2026, although federal litigation is still pending. On February 10, a federal judge refused to block parts of the law’s implementation and found that another part of it is preempted by federal law. Both parts of the ruling are being appealed.

The law would prohibit financial institutions from charging or receiving exchanges on sales and gratuity taxes. In some cases, this could account for almost a third of an entire transaction, such as a purchase at a restaurant in Chicago with a 10% tax rate and a 20% tip.

Unfortunately, the logistics of implementing such a proposal are incredibly complex and the burden it would place on small businesses could be enormous.

Would merchants undertake costly upgrades to new processing hardware and software to split a purchase into one portion that is exempt from interchange fees and the other portion that is not? Would these companies charge interchange fees on the entire transaction and then request a refund for specific components? And with 102 counties and many more municipalities in Illinois, how will the different tax rates be tracked?

Not surprisingly, large retailers are the biggest beneficiaries of these policies, as they have high transaction volumes and huge accounting teams to help implement such a complex new system (and cover the costs associated with it).

In fact, a study (pdf link) by the Electronic Payments Coalition found that Illinois’ 40 largest retailers would take home nearly 40% of any interchange fee savings gained from the bill. The state’s approximately 1.3 million small businesses would have to deal with implementation headaches and lose significant savings.

Even those big retailers would be unlikely to pass those savings on to customers. When debit card sharing was limited by the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, only 1.2% of merchants lowered prices, according to a survey by the Federal Reserve Bank of Richmond.

The party that would be most affected by the new law in Illinois is the average consumer.

Impact on the consumer

According to the IFPA, what was once simply swiping a credit card could become a multi-step processas companies try to split a single transaction into two (or more): one for goods or services and the other for taxes and gratuities, as applicable. They may even require two different payment methods.

For example, a restaurant customer may pay for food and drinks with a card and have to shell out cash (or write a check) to pay the tax and tip.

There are also privacy concerns with this type of legislation, as a merchant would need to share additional details about their purchases to ensure compliance with the law. If a merchant decides to itemize transactions in their system to avoid interchange fees on taxes and tips, what was previously a completely private transaction could suddenly be shared with other parties.

And to make matters worse, awareness of this law remains quite low.

A recent survey by Morning Consult found that less than a third (31%) of Illinois residents are familiar with the upcoming changes. However, once they find out about them, opposition increases to 61%, encompassing all political tendencies. Most importantly, 81% of Illinoisans say the current electronic payment system should remain unchanged.

More than two dozen states considered similar legislation last year; none of them passed. This held regardless of the political party in charge, as the bills were rejected in blue, red, and purple states.

However, several other jurisdictions are considering similar legislation, or even measures that go much further. This includes Colorado, Georgia, Pennsylvania, and the District of Columbia.

In a nutshell

While efforts continue at the federal level to regulate credit card processing, new initiatives are emerging in the states. A law that would exempt taxes and tips from interchange fees will take effect in Illinois on July 1, creating confusion among consumers and imposing substantial burdens on small businesses.

Regardless of location, these regulations share some important similarities. The biggest beneficiaries are the largest retailers, and implementation would add friction to a process that safeguards your data and allows you to earn rewards with every use of your credit card. The global payments system is designed to work the same for everyone, at all times and everywhere. Injecting inconsistency into this universal (and convenient) process at the state level could alter the very nature of how you pay and how you earn rewards for your purchases.

If you would like to make your voice heard, you can share your opinions on these bills with your elected representatives at the following links: