Delayed Ban on Fees for Processing Taxes and Tips

Two years ago, Illinois enacted consumer-pleasing limits on what are commonly called swipe fees—the charges tied to processing credit card payments. The prohibition on collecting fees for handling payments that cover tips and taxes has since been postponed twice as federal judges and lawmakers grow wary that the policy they crafted could create a financial tumble. These holdbacks may, in fact, be shielding the state from unintended fallout, as a fresh analysis warns the measure could injure everyday shoppers, small shopkeepers, and local lending institutions.

Popular or Not, Fees Offset Expenses

The Interchange Fee Prohibition Act (IFPA), which was tucked into a 2024 revenue package, defines an “interchange fee” as a charge set by a payment-card network intended to compensate the issuer for participating in an electronic payment. It further stipulates that an issuer, a card network, an acquirer, or a processor may not collect any interchange fee from a merchant on the portion of a transaction that covers the tax or tip if the merchant communicates the tax or tip amount to the acquirer during the authorization or settlement phase of the payment.

Legal scholars noted at the time that merchants had long advocated for such changes, but industry representatives argued that barring these charges imposes a disproportionate burden by compelling them to process certain parts of transactions without reimbursement. They also warned the new rules could force Illinois payments to diverge from those used elsewhere in the United States and around the globe.

The dispute has moved into courtrooms and public forums, pitting advocates who view the fees as obscured costs against critics who describe them as a standard industry mechanism to cover business expenses.

A federal judge’s ruling to pause enforcement of the law—which was slated to begin in July after a string of delays—came as legislators simultaneously signaled a halt until July 2027. Given the potential ripple effects of state intrusion into payment arrangements, many observers see the pause as prudent.

“While the measure is pitched as relief for merchants, it is more likely to yield unintended consequences for consumers, financial institutions, and the majority of merchants the law aimed to aid,” argued Steve Swedberg of the Competitive Enterprise Institute (CEI) in a report released recently. “More broadly, the IFPA raises fundamental questions about whether state regulation of payments can function harmoniously with the uniform standards required for a national payments system.”

Popular or Not, Fees Offset Expenses

Swedberg explains that payment networks act as middlemen in transactions between cardholders and merchants. It’s a potentially lucrative line of work, but it requires substantial behind-the-scenes infrastructure: Visa disclosed operating expenses exceeding $16 billion in 2025, covering network and processing costs, labor, and depreciation of technology and equipment. Mastercard reports comparable costs, while banks and credit unions that issue cards must also sustain corresponding facilities.

Fees are designed to offset these outlays. Dismissing them as hidden charges does not erase why they exist, even if consumers dislike paying them on amounts for taxes and tips.

Swedberg highlights that this isn’t the first bid to curb swipe fees. He notes the Durbin Amendment, part of the 2010 Dodd–Frank Act, which capped debit-card interchange charges by large financial institutions.

Caps on Swipe Fees Hurt Those They’re Supposed To Help

A 2019 study from Vladimir Mukharlyamov of Georgetown University and Natasha Sarin of the University of Pennsylvania found that the Durbin Amendment reduced annual bank revenue by about $6.5 billion. The researchers reported that “covered banks responded to this 25 percent drop in interchange revenue by doubling monthly maintenance fees on checking accounts, shrinking the share of households with free checking from roughly 60 percent to about 20 percent.” They added that the amendment may have pushed some consumers away from the traditional banking system toward more expensive alternatives, with little indication of broad consumer savings.

Swedberg cites a 2015 brief from the Federal Reserve Bank of Richmond, which concluded that price caps on interchange did not generally save money for shoppers. The authors, Renee Haltom and Zhu Wang, reported that the vast majority of merchants in the survey (77.2 percent) did not lower prices after the regulation; a tiny fraction (1.2 percent) reduced prices, while a sizable portion (21.6 percent) raised prices.

In short, the most recent nationwide effort to cap interchange fees appeared to raise costs for both banks and some retailers, rather than producing universal savings for customers.

Swedberg also warns that community banks and credit unions—smaller actors with more limited resources—would bear extra burdens under Illinois’ approach. The law’s added friction from data submission, verification, and delayed reimbursements would introduce new operating costs and timing mismatches, particularly for smaller institutions with lean compliance capabilities.

Smaller lenders are more prone to errors that could trigger the IFPA’s $1,000 penalty for each noncompliant transaction, an amount that can accumulate quickly.

Swedberg notes that smaller merchants could face greater disruption as the law compels changes to the payment systems used by merchants, card issuers, and networks. “Large retailers with integrated payment ecosystems can implement these changes using existing infrastructure,” he observes, “whereas smaller merchants face higher relative costs from upgrades, middleware, or workaround solutions.”

Haltom and Wang observed that following the Durbin amendment, for transactions of $10 or less, only about 2.8 percent of merchants were estimated to lower debit costs, around 31.8 percent saw higher costs, and 65.4 percent experienced no change. The flexibility that once existed for setting fees gave way to a more rigid regime that increased costs for some retailers.

Avoid Fees the Old-Fashioned Way

Taken together, Illinois lawmakers’ bid to appease the crowd by mandating lower costs appears poised to backfire, potentially leaving consumers, small banks, and retailers with higher costs and fewer options if financial institutions move to sidestep the regulatory headaches.

“To safeguard the integrity of the checkout experience and prevent financial providers from exiting the Illinois market, the IFPA should be repealed or reversed,” Swedberg concludes.

Credit card charges are undeniably burdensome for both consumers and merchants. Ultimately, the most straightforward way to bypass them remains the traditional method: use cash.