A federal court in Illinois today partially upheld a first-of-its-kind state law restricting interchange fees for debit and credit card payments, striking down only the portion of the law that restricts the sharing of certain data obtained in transactions.
The Illinois Interchange Fee Prohibition Act, or IFPA, bans banks, payment networks and other entities from charging or receiving interchange fees in Illinois on the portion of a debit or credit card transaction attributable to tax or gratuity. The American Bankers Association, Illinois Bankers Association and other groups challenged the IFPA in the U.S. District Court for the Northern District of Illinois, arguing the law violates multiple federal statutes.
“This is a close case,” Judge Virginia Kendall wrote in her decision, acknowledging that no other state has a law like the IFPA. Kendall ultimately upheld the interchange fee ban. Among other things, she rejected the plaintiffs’ arguments that the National Bank Act preempted the law’s ban on interchange fees, in part because payment networks set fees, not banks.
“(W)hile that argument definitively protects national banks from intrusion into the fees they charge on their ATMs and savings account services, it is hard to square with a state law that impacts a fee that those same banks do not set and that are not keyed to their particular services,” Kendall wrote.
The IFPA also prohibits all entities except merchants from sharing data other than what is needed to facilitate the transaction or is required by law. Kendall sided with the plaintiffs in ruling that the data-sharing restriction is preempted, as federal law gives financial institutions broad power to engage in data processing.
In a joint statement, ABA, IBA and the other plaintiffs expressed disappointment with the decision and said they plan an appeal.
“As the co-plaintiffs demonstrated and the [Office of the Comptroller of the Currency] agreed, IFPA is clearly and fully preempted by federal law,” they said. “The decision not to protect the payment system from this misguided state law is a serious error that will unleash chaos and confusion on Illinois consumers and businesses. We cannot let that stand.
“In light of this outcome, we renew our call for state lawmakers to repeal this flawed law before it can do any more harm to the Illinois economy,” the plaintiffs added. “The fight over IFPA and any similar proposal will continue.”
The law is set to take effect July 1.
