Retailers scored a big win this summer in their decades-long fight to reduce card swipe fees when Illinois lawmakers eliminated the fees on sales taxes and tips.
Now, merchants and their supporters are hoping other states will follow, while banks, credit card companies and their advocates are determined to block the first-in-the-nation law and snuff out similar proposals elsewhere.
State and national banking groups sued last month to block the Illinois law. Richard Hunt, head of the Electronics Payments Coalition, vowed in a statement supporting the lawsuit that “no stone will be left unturned to correct this draconian disruption to the safe, secure, hassle-free credit card system Illinois consumers, small businesses and community financial institutions rely on every day.”
Retailers and banks have fought for years over swipe fees, also known as interchange fees, which financial institutions charge merchants when customers buy with a credit, debit or prepaid card.
Lowering the fees would save merchants billions and could potentially bring down prices. But it would deprive banks of revenue they use to securely process payments and fund rewards programs.
Advocates for merchants say the Illinois law may catch on.
“This is a commonsense measure that helps bring down [fee] costs for Illinois families and retailers,” said Illinois Sen. Cristina Castro (D). “And it is something that is starting to gain ground in other states.”
She said lawmakers from across the country discussed limiting swipe fees at the National Conference of State Legislatures’s annual summit last month. “It runs the gamut, it doesn’t necessarily have to be blue state or red state. A lot of lawmakers are looking into this.”
Pennsylvania lawmakers are considering a bill that would eliminate swipe fees on sales taxes. The Georgia House this year formed a committee to study the fees. Tennessee lawmakers directed an intergovernmental agency to look into them.
Banking industry advocates say the Illinois law won’t be replicated. The swipe fee provision was tucked into the state budget to compensate retailers for losing a sales tax break, three years after Castro’s standalone bill failed to advance.
“It didn’t go anywhere when it went through what we call regular order in the legislature,” said Ben Jackson, executive vice president for government relations at the Illinois Bankers Association.
Past attempts to limit swipe fees by lawmakers in other states have gone nowhere. Current efforts may meet the same fate.
Pennsylvania Senate Majority Leader Joe Pittman (R) told Spotlight PA in June that his chamber was unlikely to consider the bill pending in the Democratic-controlled House. “There’s a lot of spin and swirl on that issue,” he said of the swipe fee debate.
Financial institutions add an interchange fee of around 2% to card transactions. It’s a small surcharge that adds up to big money. U.S. retailers paid over $160 billion in processing fees to accept cards in 2022, according to Nilson Report, a publication that researches payment systems.
Banks and credit unions say the fees cover the cost of providing a service. Retailers say the cost is exorbitant — and crippling.
Card fees are the second highest operating cost U.S. retailers face, said Doug Kantor, executive committee member of the Merchants Payments Coalition, which advocates for restaurants, supermarkets, retailers and other merchants.
“Labor is No. 1, card fees is No. 2,” he said. “It’s more than the cost of health care, it’s more than the cost of rent on commercial space, it’s more than the cost of utilities. It’s unbelievable how expensive it’s become.”
The European Union and other foreign governments regulate interchange fees to keep them low. The U.S. caps fees on debit card purchases — currently set at 21 cents plus 0.05% of the transaction for large issuers — but not credit and commercial prepaid card purchases.
Retailers are seeking relief from U.S. swipe fees on multiple fronts, including through a long-running antitrust lawsuit, a bill in Congress aimed at increasing competition among credit card networks, and state bills that would eliminate swipe fees on the sales tax portion of a transaction.
Supporters of eliminating swipe fees on state and local sales taxes say it’s a reasonable change that helps businesses.
“We’re talking about the sales tax that we are administering and collecting and remitting on behalf of the state and units of local government,” said Robert Karr, president and CEO of the Illinois Retail Merchants Association. “There shouldn’t be an additional fee on that.”
He said the same goes for fees on tips. “That is what the consumer is leaving for the service employees. The business should not be penalized for that.”
Banking groups say the Illinois law conflicts with federal and state banking regulations. They also argue that it’s unworkable, requiring financial institutions and retailers to install costly new software and hardware by a July 1, 2025, deadline.
“The whole system is not going to be rebuilt by July 1,” said Nick Simpson, spokesperson for the Electronic Payments Coalition. “It’s just not possible.”
Supporters of eliminating swipe fees say those concerns are overblown.
The federal government prohibits interchange fees on purchases made with state-issued electronic payment cards loaded with food stamps and other nutrition benefits. Castro said that shows banks are able to separate out interchange fees.