Illinois’ landmark credit card fee law prompting strong opposition

Illinois lawmakers in the closing hours of the General Assembly’s spring session last month became the first in the nation to ban banks and credit card companies from charging retailers a seemingly small fee on sales taxes and tips.

But since Gov. J.B. Pritzker signed the ban into law, financial institutions that opposed the measure have ratcheted up their opposition and amplified their rhetoric, saying the move isn’t just bad for them but will also cause headaches for consumers.

Just last week a trade association representing credit card companies and banks began running online ads in Illinois declaring the ban “MAY FORCE YOU TO PAY FOR PARTS OF PURCHASE IN CASH,” and print ads saying, “Tipping on your credit card is closed to Illinoisans.”

While some supporters — which include many Democrats and Illinois’ main association for retailers — say those claims are hyperbolic, the new law is setting up what could be a yearslong fight between the state and financial institutions that argue the overhaul is not only a bad idea but is unrealistic because it calls for implementation in a little more than a year.

At issue are fees charged to retailers, restaurants and other businesses when they accept credit or debit card payments.

Credit card companies and financial institutions currently charge the retailers and restaurants a fee when consumers use cards, based on the total transaction amount of the goods, tax and any tip. The new law would bar the financial institutions from charging the so-called interchange fees on the tax or gratuity portions of customers’ bills, with the goal being to lower the amount that credit card companies can charge retailers.

Both sides say they are advocating for consumers. Supporters of the ban say the interchange fees are hidden charges that get passed down to customers. Opponents argue the law will create chaos for anyone in Illinois who uses a credit or debit card by potentially forcing separate transactions — one for purchases of goods and another for taxes and tips — while also creating paperwork nightmares for small businesses.

U.S. Sen. Dick Durbin, the Illinois Democrat leading the charge on credit card reform at the national level, said earlier this month that he supports Illinois’ ban. Durbin introduced federal legislation that would create greater competition among credit card processors Visa and Mastercard in an attempt to lower transaction fees.

“I like what the state of Illinois did. … I think both of those are a step in the right direction,” Durbin said of his bill and Illinois’ law.

The Illinois Retail Merchants Association also backs the new law. The elimination of the fees will provide savings for retailers facing some $101 million in tax hikes included in Illinois’ recently passed budget.

IRMA President Rob Karr said the deal will require financial institutions and retailers to alter how they do business, but many of the retail association’s members are small businesses that support the change because it would lower fees, he said.

“While it will require some change for them … it will result in a much fairer system,” Karr said in an interview before the measure passed.

Credit card fees average just over 2% of retail transactions, according to the National Retail Federation, meaning about $98 of every $100 sale goes to the retailer.

In addition to the banks and credit card companies being generally opposed to the law, one of their bigger sticking points is that companies must overhaul their systems by July 2025 to comply. That means Illinois would be the first state to require a distinction on consumer retail transactions between goods, taxes and tips, creating the need for a complicated software change, the groups say.

If those new systems aren’t in place by July 2025, they say, that’s when the chaos kicks in and consumers could be forced to pay taxes and tips with cash because the credit card companies can’t or won’t process them.

Former Republican state Sen. Steve Rauschenberger is a consultant aligned with the Electronic Payments Coalition, a trade association representing the interests of Visa, Mastercard, Chase, Wells Fargo, Bank of America, Capital One and other large financial institutions.

Rauschenberger said that even if the industry could create and deploy new software to separate out different portions of a transaction — “and I think that is a big if” — it could take three to five years, much longer than the implementation date expected for the new law.

“Unless there are serious efforts to repeal this new law, issuing banks and credit unions will be forced to inform some 7 million Illinois card holders of the changes required by Illinois’ new law as the effective date approaches,” Rauschenberger said, adding: “I would expect we will hear an outcry.”

“It’s silliness” that credit card companies and banks claim they can’t find a way to distinguish tax and tip charges, Karr said in response to the financial institutions’ concerns. “They claim this every time there’s a change to debit or credit functions.”

Reforms to credit card fees have gained momentum across the nation in recent months, with Illinois at the forefront, Karr said, noting Durbin’s bill in the U.S. Senate.

While Karr said his members support the measure, at least a few smaller business owners are aligning themselves with the financial institutions.

“If it’s not broken, why fix it?” asked Alex Cabrera, the owner of Lalo’s Restaurant on Maxwell Street just east of Halsted Street.

Business owners in Chicago so far know little about how the change would be implemented, Jose Garcia, president of Northwest Community Credit Union and a member of the Illinois Credit Union League Board of Directors, added in a joint interview with Cabrera.

The prospect of requiring cash in transactions is especially worrisome to Cabrera and some other business owners who see it as a potential inconvenience to tip-paying customers and a liability to businesses.

There are a lot of unanswered questions about how the change will be implemented, Cabrera said, but he predicted “it’s going to be burdensome. Yes, it’s going to be a pain.”

Even if credit card companies continue to allow transactions for taxes and tips, customers may need to swipe multiple times, according to a letter sent to Pritzker earlier this month from financial institutions that unsuccessfully lobbied the governor to veto the provision.

American Airlines, Southwest Airlines and United Airlines, which each operate their own credit card programs, last month also sent a letter to Pritzker and legislative leaders asking them to reject the proposal.

Opponents have additionally complained that the provision was introduced just days before the adjournment of the Illinois legislature’s spring session.

Legislative leaders and Pritzker agreed to include the provision in the broader revenue proposal after IRMA proposed it, a spokesperson for the governor said in an email last week.

The change was suggested by retailers because of the separate tax hike on retail elsewhere in the revenue package, said state Rep. Kelly Burke of Evergreen Park, who sponsored the bill. The hike caps a discount for retailers at $1,000 per month versus the currently allowed 1.75% of sales taxes retailers collect for the state.

Burke said the quick legislative process for omnibus bills at the end of session “shouldn’t be new to anybody.”

“Things come together quickly,” she said.

But Burke didn’t close the door when asked about the potential for some sort of compromise with the financial institutions. The General Assembly gathers again in the fall for the veto session and, in general it’s not unusual for measures to be amended or implementation dates pushed, she said.

“If we decide at the end of the day that we can call the credit card companies’ and the banks’ bluff and say, ‘We think that you can very much implement this,’ then Illinois will be the first to do it,” said Democratic Rep. Margaret Croke, who nevertheless voiced concerns about the credit card change in a committee hearing on the day of the vote.

“And I’m OK with Illinois being the first to do something like this, but just not without all this information,” she said, echoing in part the call of some opponents, who have called for a study of the issue rather than implementing the change.

Croke, who still voted for the larger revenue package, said she fears the measure opens Illinois to costly lawsuits.

“Working with some of these companies that have bigger pocketbooks and are resistant to change, without having a solid argument and thoughtful conversation about why this change needs to occur — their initial reaction is going to sue,” Croke said in an interview earlier this month.

The moderate lawmaker from Chicago’s North Side said she’s also concerned about privacy: If credit card issuers or processors itemize transactions, that could result in a valuable trove of data about Illinois consumers’ purchases, she speculated.

Rauschenberger, the former Republican lawmaker, said credit card companies are concerned Illinois’ law will open a “Pandora’s box” of regulation — potentially an “existential threat” to the current payment system.

In the days before signing the revenue package, Pritzker said he didn’t foresee any changes, but that the credit card issue is “certainly something I think we’re always willing to discuss, revisit, have a conversation about. There’s time to do that through the rest of the year.”