Illinois Interchange Fee Prohibition Act
Illinois Bankers Association v. Kwame Raoul, in his official capacity as Illinois attorney general
Date: Aug. 21, 2024
Issue: Whether the Illinois Interchange Prohibition Act is preempted by the National Bank Act (NBA), Home Owners’ Loan Act, Federal Credit Union Act, and Electronic Fund Transfer Act.
Case Summary: The American Bankers Association, Illinois Bankers Association, America’s Credit Unions, and Illinois Credit Union League sued Kwame Raoul in his official capacity as the attorney general of Illinois, challenging the Illinois Interchange Prohibition Act (IFPA) in the Northern District of Illinois, while also moving for a preliminary injunction.
On June 7, 2024, the state of Illinois enacted the IFPA which bans banks, payment card networks, and other entities involved in processing debit or credit card transactions from charging or receiving “interchange fees” in Illinois on the portion of a transaction attributable to taxes or gratuities (the Interchange Fee Prohibition). The IFPA also mandates a “Data Usage Limitation” that prohibits “any entity, other than the merchant” involved in an electronic payment transaction to “distribute, exchange, transfer, disseminate, or use” the associated data “except to facilitate or process the transaction or as required by law.”
Complaint. The trade groups advanced several arguments to support declaratory and injunctive relief.
- The IFPA is unconstitutional and preempted by the NBA because it significantly interferes with a national bank’s exercise of its enumerated and incidental powers, citing the Barnett Bank standard from Cantero. If preempted under the NBA, the IFPA cannot be applied to Illinois or other state-chartered banks under Illinois’ wildcard statute, which gives Illinois state banks parity with national banks) and the dormant Commerce Clause.
- The Home Owners’ Loan Act (HOLA) preempts the IFPA. HOLA allows federal credit unions to obtain a charter from the federal government and acquire by federal statute comparable powers to those the NBA grants national banks.
- The Federal Credit Union Act (FCUA) preempts the IFPA. FCUA allows federal credit unions to obtain a charter from the federal government and acquire by federal statute enumerated and incidental powers which include processing credit and debit cards.
- The IFPA is unconstitutional and conflicts with the powers granted to the Federal Reserve under the Durbin Amendment to the Electronic Fund Transfer Act to “prescribe regulations … regarding any interchange transaction fee that an issuer may receive or charge with respect to an electronic debit transaction.” 15 U.S.C. § 1693o-2(a)(1), (a)(3)(A). Regulation II does not carve out taxes and gratuities from the transaction amount in the uniform standard for debit card interchange.
- The IFPA requires complex, impracticable, and costly changes to card payment processing to exclude taxes and gratuities and requires immensely burdensome processes to handle manual merchant requests for reimbursement.
- The IFPA’s Data-Usage Limitation interferes with “fraud detection, claims investigation, accounting reconciliation, Know Your Customer and anti-money laundering compliance programs, credit limit determination; card offers, features, benefits, and rewards and cash back processing; as well as the exercise of other powers granted by the NBA, HOLA, FCUA, and these statutes’ accompanying regulations.”
ABA requested that the court issue a judgment declaring the IFPA is preempted, unconstitutional, and invalid as applied to any “issuer, payment card network acquirer bank, processor, or other designated entity” as well as any other participants in the payment system needed to afford complete relief. ABA also requested that the court permanently enjoin Raoul and his agents from taking any investigatory or enforcement actions predicated on the IFPA.
Motion For Preliminary Injunction. In addition to its complaint, ABA filed a motion for a preliminary injunction to block the IFPA from taking effect. ABA further advanced the claims from its complaint and argued it is likely to succeed on the merits.
ABA contended the IFPA prevents or significantly interferes with national banks’ power to receive fees, process credit, and debit card transactions, receive deposits, and make loans through debit cards. By placing state limitations on national banks’ federal authority to charge interchange fees, the IFPA will compromise banks’ ability to offer services in the manner that best advances their business goals. This is precisely the type of result the NBA’s preemption rule is designed to prevent, according to ABA. What is more, if the IFPA is not held preempted, the problem will be exacerbated, as comparable laws under consideration in other states may take effect. In effect, this will further multiply the inefficiencies and interference with the exercise of federal powers.
Next, ABA asserted the Data Usage Limitation prevents or significantly interferes with national banks’ ability to process data. A national bank has the express federal powers to “provide data processing, and data transmission services … and access to such services for itself and for others with respect to banking, financial, or economic data.” Because federal law permits the processing and use of data, regardless of whether it comes from particular transactions, Illinois’ attempt to impose limits based on that characteristic of the data is preempted.
ABA also claimed the IFPA cannot be applied to card networks and other participants in the payment system because Illinois may not indirectly regulate preemption. In Watters v. Wachovia Bank, N.A. the U.S. Supreme Court determined that “there is no basis to conclude that the preemptive reach of the NBA extends only to a national bank itself.” For this reason, the IFPA cannot limit parties in the payment system to facilitate chartered institutions’ exercise of their NBA, HOLA, or FCUA powers. Thus, ABA maintained Card Networks and other participants in the payment system are covered by federal preemption.
Additionally, ABA explained the EFTA Preempts the IFPA’s application to debit card interchange fees. In 2010, Congress passed the Durbin Amendment to the EFTA. The Federal Reserve responded by promulgating Regulation II, which limits debit card interchange fees to the sum of a fixed rate of “21 cents” and an ad valorem component of 0.05% “multiplied by the value of the transaction.” In doing so the Federal Reserve set a “Uniform Interchange Fee Standard” which it declared “would apply to all electronic debit transaction not otherwise exempt.” By setting a different standard, the IFPA disrupts uniformity and conflicts with both Regulation II and the Durbin amendment as nothing in Regulation II’s text addresses whether gratuities or taxes must be part of the “value of the transaction” on which the ad valorem amount is calculated.
Finally, ABA argued its members would suffer irreparable harm absent a preliminary injunction. The unrecoverable costs of compliance would be enormous because of the scope of changes the IFPA requires, and the extremely compressed time scale the Act demands. ABA noted adopting any Automatic Process by the July 1, 2025, deadline is likely infeasible given the time for updated standards and technical specifications from the card networks. The cost ABA members will incur to develop and implement the required changes would likely reach tens of millions of dollars for large institutions and be comparably great in relative terms for smaller institutions.
Bottom Line: Illinois’s response to motion for preliminary injunction is due Oct. 4, 2024.
