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A lawyer with the Jones Day law firm told a federal judge Wednesday that banks and credit unions should be exempt from an Illinois law that excludes taxes and tips from interchange fees.
Illinois passed the Interchange Fee Prohibition Act in June 2024 at the request of restaurants and other merchants who pay the interchange fees on credit and debit card transactions. The fees go to the card issuers with a portion going to the banks and credit unions that process the payments.
The suit was filed in U.S. District Court against Illinois Attorney General Kwame Raoul in August 2024 by the Illinois Bankers Association, the American Bankers Association, America's Credit Unions and the Illinois Credit Union League.
In June, the state agreed to delay implementation of the law for a year.
During two hours of oral arguments Wednesday, Charlotte Taylor, a Jones Day lawyer representing the banks and credit unions, said the National Bank Act preemption clause should not only shield banks and credit unions from the law, but also the companies that issue credit cards, and who ultimately receive the bulk of interchange fees.
“Illinois has imposed a haircut on the amount that issuers get paid for transactions,” Taylor said.
Darren Kinkead, a lawyer for the Illinois Attorney General, said sales taxes exclude only about 9% of the total transaction from interchange fee calculations.
“It’s a very small percentage of the overall amount of interchange fee,” Kinkead said. “They’re getting quite a bit of it. So they are not doing any work for which they’re not being compensated.”
Kinkead said the National Bank Act allows states to impose stricter consumer protections.
U.S. District Judge Virginia Kendall asked Kinkead whether the law essentially eliminates interchange fees for a portion of the transaction.
Kinkead said it was a matter of “semantics.”
“We’re looking at it from the perspective of the interchange fee as a whole,” Kinkead said. “We’re saying ... you can still collect almost all of the interchange fees that you can collect right now, but we’re just going to limit the very small amount of it at the margin.”
“And I think there’s a justification for that, your Honor, because the tax and tip are not passed on to the merchant. They’re passed on mostly to the state,” he said. “The tip is passed on to the people who run it working at the restaurant.“
Even if the court rules the National Bank Preemption applies, it does not apply to the card networks and would not apply to banks chartered by states outside Illinois.
“So that is going to leave only non-Illinois institutions out in the cold,” Kinkead said. “They will have to take the haircut on their business activities for transactions with a link to the state.“
Such a ruling would create a “dormant commerce clause violation,” which prohibits states from passing laws that excessively burden interstate commerce. “It’s a benefit to Illinois banks and that is not extended to non-Illinois institutions.”
The banks and credit unions asked in March for a preliminary injunction. AmCU said Thursday a ruling on the injunction “could be imminent.” A ruling on the case could come by year’s end.
Contact Jim DuPlessis at JDuPlessis@cutimes.com.
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