By Hugh Carney
ABA Viewpoint
Hugh Carney is EVP for financial institutions policy and regulatory affairs at ABA.
A recent case out of Illinois raises a fundamental question for the U.S. financial system: Can a single state dictate how national banks provide payment services and are compensated for them? The Office of the Comptroller of the Currency, joined by a bipartisan group of former comptrollers, has answered: Clearly, no. Their amicus briefs underscore a longstanding principle of federal law: States may not prevent or significantly interfere with the exercise of national bank powers.
This case, in which ABA is a co-plaintiff, is not just about interchange fees. It is about whether the United States will continue to operate under a uniform national banking system or drift toward a fragmented, state-by-state regime that raises costs and reduces access to financial services.
A national system requires national rules
Congress created the national banking system to support interstate commerce and ensure consistent access to financial services across the country. National banks are granted core powers, including the ability to lend money, take deposits and provide payment services. Those and other federally granted bank powers are not static but evolve alongside the financial system.
Today, banks exercise these powers through modern payment systems, including credit and debit card networks. These systems allow banks to deliver fast, secure and reliable services to consumers and businesses nationwide. As the OCC brief explains, activities such as payment processing, fraud prevention and data use are not peripheral. They are integral to the business of banking and fall squarely within the powers granted under federal law.
Equally important, national banks must be able to receive compensation for the services they provide. Federal law and OCC regulations recognize that charging fees is an inherent part of the business of banking. Interchange fees are one mechanism by which banks are compensated for extending credit, facilitating payments, managing risk and preventing fraud.
The legal standard is clear
The Supreme Court has long held that state laws are preempted when they “prevent or significantly interfere” with national banks’ exercise of their powers. That standard, articulated in Barnett and reaffirmed recently in Cantero, focuses on practical effect, not formal labels.
As the OCC emphasizes, the relevant question is not whether a state law directly regulates a bank. Rather, the question is whether the law interferes with what federal law allows banks to do.
That distinction matters. If states could avoid national bank preemption simply by targeting third parties, such as debit and credit card network operators, or otherwise structure laws to indirectly accomplish what federal law prohibits states from doing directly, the national banking system would quickly become exposed to a regulatory patchwork subject to the (often conflicting) whims of fifty different states.
Illinois law crosses the line
The Illinois Interchange Fee Prohibition Act attempts to restrict how banks are compensated for payment services and how they use transaction data. According to the OCC, these provisions do far more than impose modest constraints. They strike at the core of national bank powers.
First, the law limits banks’ ability to receive compensation for services that are central to lending and deposit taking. Interchange fees are not incidental. They are part of the economic framework that allows banks to provide fast, secure and reliable card services at scale.
Second, the law would require significant operational changes to the payments system. The OCC warns that complying with a single state’s requirements could impose staggering costs and disrupt the efficient functioning of nationwide debit and credit card payment networks. Even the district court recognized that the statute would be “indisputably disruptive” requiring “new procedures to replace the current process for authorizing and settling debit and credit card transactions” and would impose “staggering costs on banks.”
Third, restrictions on data usage would impair banks’ ability to detect fraud, manage risk and provide essential services to customers. In a modern financial system, data is not optional. It is critical infrastructure.
These effects meet the Supreme Court’s standard. A law that undermines compensation, disrupts operations and weakens risk management does more than touch on banking. It significantly interferes with it.
The ‘who sets the fee’ argument misses the point
The district court focused heavily on the fact that payment networks, rather than banks themselves, establish default interchange fees. But both the OCC and the former comptrollers explain why that distinction is legally irrelevant.
Banks use networks as a means of exercising their powers. They choose to participate in and support these systems because they provide efficiency, scale and interoperability. The fact that a network sets a default fee does not change the underlying reality: the fee compensates the bank for its services, and the bank receives it.
As the former comptrollers note, national banks routinely rely on third parties and technological systems to deliver banking services. That has been true for decades and reflects the evolution of the industry. A state cannot avoid preemption by regulating the mechanism through which banks exercise their powers rather than the banks themselves.
A bipartisan, longstanding view
The former comptrollers’ brief is particularly notable. It brings together leaders of the OCC from multiple administrations, spanning several decades. Despite differences in policy perspectives, they agree on this point: the Illinois law interferes with core banking powers and should be preempted.
Their collective experience reinforces that this is not a novel or aggressive interpretation of federal law. It is a continuation of how the OCC has consistently understood and applied the National Bank Act as banking has evolved.
What’s at stake
If states are permitted to impose their own rules on how national banks provide payment services and are compensated, the result will not be limited to one statute in one state. It will invite a patchwork of conflicting requirements.
That fragmentation would have real consequences. It would increase costs for banks and merchants, reduce efficiency in the payments system, and ultimately limit access to credit and financial services for consumers and businesses.
Congress established a national banking system to avoid precisely that outcome. The preemption doctrine is a key part of that framework, ensuring that national banks can operate under consistent rules and deliver services across state lines.
Bottom line
The OCC and former comptrollers are aligned on a simple but important principle: states may not interfere with the exercise of federally granted banking powers. The Illinois law does just that.
At stake is more than a single fee. It is the continued integrity of a national banking system that supports economic growth, innovation and access to financial services across the country.
ABA Viewpoint is the source for analysis, commentary and perspective from the American Bankers Association on the policy issues shaping banking today and into the future. Click here to view all posts in this series.
