Who really benefits from the Illinois Interchange Fee Prohibition Act?

As we turn the page from summer into fall, I’d love to be writing about something lighter. But the truth is, our industry is entering a critical season and with serious legislative threats on the horizon we can’t afford to be complacent.

Have you heard of the Illinois Interchange Fee Prohibition Act—or IFPA for short? If this law goes into effect, it will prohibit sales tax and gratuity from interchange fee calculations for all state and federally chartered credit unions and state-chartered community banks. That amounts to a potential loss of billions threatening credit unions’ mission to serve members and communities. You must be thinking, “thank goodness I’m not chartered in Illinois.”

But here’s where it gets tricky. Even if your credit union isn’t chartered in Illinois, this will affect you. If your members use a VISA or Mastercard-backed debit or credit card in the state of Illinois, your credit union is expected to comply. And if you don’t? You could be fined $1,000 per transaction.

That’s right—when your member buys a $6.85 latte in Illinois (how many of your members fly through O’Hare or Midway airports, or visit Chicago on business or pleasure?)—and if your card processor can’t segment out the tax and tip (spoiler: it can’t)—you’re looking at a thousand-dollar penalty. It’s not even proportional. It’s bonkers.

You might be wondering, “How the heck did Illinois get here?”

IFPA—or similar efforts to regulate interchange fees—have been proposed or considered in other states over the past two decades. However, no state has gone as far or as fast as Illinois. It passed in the middle of the night during the final hours of the May 2024 Spring legislative session, buried deep inside the state’s revenue bill.

“Our moms always said nothing good happens after midnight,” said Laura E. Weis, president and CEO of the Champaign County Chamber of Commerce.

So why did it pass? It was a compromise—brokered by the Illinois Retail Merchants Association (IRMA)—to offset the financial loss retailers faced after the state revised the unlimited sales tax reimbursement retailers historically received for recordkeeping expenses and capped the reimbursement at $1,000 per month. This impacted the highest volume retailers (a.k.a., national brands or Big Box retailers). When the unlimited reimbursement ended and the cap of $1,000 per month was instituted, the state needed a bargaining chip to appease IRMA.

Enter IFPA, a win for the largest national merchants, a surprise and punishment for everyone else.

IRMA, the Illinois Retail Merchants Association, is no newcomer. Founded in 1957, it's one of the most powerful retail trade groups in the country, with deep political ties and big-time sponsors like Amazon, Walmart, Walgreens, CVS, McDonald's, and Home Depot, just to name a few.

Their influence was evident in how quickly and quietly IFPA passed—and without input from credit unions, banks, or payment processors. When these financial institutions pushed back, IRMA didn’t hold back.

In a public statement, they accused banks and credit unions of “refusing to require compliance . . . taking hundreds of millions of dollars out of the pockets of working families and Main Street businesses and giving it to big banks.”

So, who’s benefiting? Let’s follow the money.

The winners here are the big retailers. Walgreens and CVS will save millions annually, driven by high foot traffic and tight margins. Walmart’s massive transaction volume means even a few cents per purchase quickly snowballs into millions. Home Depot’s high-ticket sales amplify the tax portion of each transaction, multiplying their savings. McDonald’s, with thousands of small purchases daily, will also see a meaningful boost. And Amazon, already a dominant force, will avoid swipe fees on every Illinois order, putting millions more in their pocket.

Take Walgreens, for example. A $50 credit card purchase could include $4.43 in tax—roughly 9¢ saved in swipe fees. Multiply that across millions of transactions, and the savings quickly reach into the millions. Walmart and Amazon alone will see multi-million-dollar windfalls in Illinois simply by avoiding interchange fees on sales tax.

That’s the line IRMA is leading with—that this is a win for small Main Street businesses.

The reality? It’s complicated, expensive, and risky for small businesses.

Consumers expect fast, seamless transactions—tap, swipe, and go. This legislation could upend that flow by requiring transactions to be split; one for the goods (subject to interchange) and another for tax and gratuity (not subject to interchange). If systems can't handle this complexity, there’s even a chance that retailers may need to ask for tax and tips in cash. Whether or not that becomes reality, one thing is certain—if the checkout experience is clunky or confusing, consumers won’t call their credit union or lawmaker, they’ll take it out on the retailer.

Upgrading will cost merchants if they can find one that even separates taxes and tips. Currently, there is no system today that can automatically split tax and tips.

Platforms like Square, Toast, Clover, and Shopify used by many small Main Street type businesses to facilitate electronic transactions cannot support IFPA compliance-or may charge these small businesses extra to develop a processing tool that can.

Businesses will need to verify processor compliance, review monthly statements, and potentially dispute fines. This could lead to businesses sending purchase receipts to credit unions and community banks asking for incorrectly assessed interchange fees to be refunded.

Also, 20-30% of small businesses in Illinois already charge a 3-4% surcharge when making a credit purchase. This law does not require any savings to be passed down to the consumers who are faced with increased costs in this extremely inflationary environment.

While IRMA touts the benefits for small Main Street businesses, the real winners are big box retailers and e-commerce giants. Main Street business and Main Street banks like credit unions are left struggling.

Fortunately, the law isn’t in effect yet. The IFPA is currently under litigation.

The plaintiffs—Illinois Credit Union League (ICUL), America’s Credit Unions, Illinois Bankers Association, and the American Bankers Association—argue that IFPA violates federal law. These industry stalwarts cite the Federal Credit Union Act, National Bank Act, and others, saying the state is overstepping.

In December 2024, Judge Kendall (Northern District of Illinois) issued a preliminary injunction, exempting national banks, out-of-state banks and federal savings associations from IFPA. That includes:

The Electronic Transactions Association cites that up to 90% of transactions will be exempt from the law under the preliminary injunction —leaving credit unions and community banks exposed. Not giving the small merchants the savings, they thought they would receive with IFPA. If the injunction becomes permanent, only credit unions and small, community banks stand to lose, not the big banks.

As Libby Calderone, president and CEO of the ICUL, put it, “Our current payments system isn’t broken, but enforcing IFPA will break it.”

The good news? Legislation passed in May 2025 to delay implementation until July 1, 2026, while litigation is still ongoing. The bad news? The fight is just beginning.

At the University of Illinois Community Credit Union (UICCU), we’ve stayed engaged.

UICCU worked to keep the tone constructive, highlighting the real impacts, and making meaningful connections—with our community, our members, and Senator Faraci’s constituents—because at the end of the day, this isn’t just about policy, it’s about how flawed legislation can hurt real people.

There have been 58 similar bills introduced across the United States over the past two decades that haven’t been signed into law. Illinois may just be the test case.

IFPA isn’t just about Illinois. It’s about what happens when powerful interests push legislation without stakeholder input—and how credit unions, small businesses, and local communities pay the price.

Engagement matters. Advocacy works. And the fight for fairness is far from over.