Illinois Retailers And Banks In Legal Dispute Over Card Charges

Merchants in Illinois asked a federal judge to leave in place the state’s ban on charging “swipe fees” on the portions of card payments that cover sales tax and workers’ tips, arguing the measure simply prevents fees on money never kept by retailers.

The plea came as US District Judge Virginia Kendall heard oral arguments in Chicago on a lawsuit filed by banking groups seeking to overturn the Illinois Interchange Fee Prohibition Act.

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The law, passed in 2024, was due to take effect in July 2025 but has been delayed by a year while litigation proceeds.

What the Illinois law would do

Illinois’ measure would bar card networks, issuing banks and processors from collecting interchange fees—commonly called swipe fees—on the tax and gratuity portions of card transactions conducted in the state.

Merchants say those parts of a bill are remitted to government or employees and should not attract processing charges.

Industry summaries of the statute highlight that it amends state law to prohibit such fees on those specific components, while preserving fees on the underlying sale amount.

At the hearing, the Illinois Attorney General’s office urged the court to reject the banks’ challenge.

Trade groups supporting the state, including the Illinois Retail Merchants Association and national merchant associations, argued that interchange rates are set by card networks such as Visa and Mastercard rather than by individual banks, so networks can comply with state restrictions without disrupting the broader payments system.

Previous stages of the case have centred on whether and to what extent the ban can be applied across banks and networks operating in Illinois.

The stakes for retailers and payment networks

Interchange fees are a routine cost for card acceptance and are typically embedded in the merchant discount rate. US swipe fees reached record levels last year, according to merchant groups, with total credit and debit fees estimated at $187.2 billion.

For retailers, the charge is material to margins and often cited as a factor in shelf prices.

Networks and issuers counter that interchange supports fraud protection, innovation and the costs of running the card ecosystem.

Visa and Mastercard together control more than 80% of the US credit card market, according to retail industry estimates, and they centrally set default interchange schedules that issuing banks use.

That market structure is a central thread in both the Illinois litigation and a wider debate in Washington over how card transactions are routed and priced.

Link to the credit card competition act

The courtroom fight in Illinois overlaps with a national push in Congress for the Credit Card Competition Act, a proposal that would require the largest card-issuing banks—those with at least $100 billion in assets—to enable an alternative, unaffiliated network option on each credit card alongside Visa or Mastercard.

Backers say allowing routing over networks such as NYCE, Star or Shazam would introduce fee and security competition and reduce processing costs; financial services groups and some small-business advocates have warned of potential disruption and consumer impacts.

The latest summaries of the bill emphasise the $100 billion asset threshold and the dual-routing requirement.

For retailers, any change to routing rules or state-level limits on interchange for taxes and tips could alter acceptance costs on high-ticket purchases or in sectors with large gratuity components, including hospitality and service.

Payments experts are watching Illinois as a possible test of whether states can carve out parts of a transaction from interchange without conflicting with federal law or network rules.

What happens next for merchants

Judge Kendall is weighing arguments from both sides as banks seek to block enforcement of the Illinois ban and merchant groups press for it to stand.

The law’s implementation was postponed to give the court time to rule, meaning retailers and processors have until mid-2026 before any final compliance changes would bite absent a ruling sooner.

Retailers operating nationally should monitor whether acquirers and gateways update pricing or routing logic to exclude state and local tax and gratuity amounts in Illinois, and whether networks issue revised interchange tables to reflect any court decision.

For global retail readers, the case underscores a broader trend: policymakers and courts are revisiting how card fees are levied and who bears them.

Any shift in US interchange rules—whether through state statutes, federal law or antitrust enforcement—could ripple across network policies and merchant contracts in other markets, informing debates on card processing fees, routing competition and transparency for consumers.

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