Credit Card Fee Dispute Continues in Illinois
The ongoing conflict regarding credit card transaction fees took another turn when a federal appeals court returned a case involving a new Illinois law aimed at capping these fees back to district court.
Typically, when customers opt to pay with credit cards, businesses incur an interchange fee, which can range from 2% to 4% of the transaction amount, not including sales tax or tips. In 2024, Illinois became the first state to enact legislation that eliminates these fees for sales taxes and tips incurred by businesses. Although this ban was set to be implemented on July 1, a banking association filed a lawsuit against the state. A federal judge supported part of the law back in February, but the plaintiffs chose to appeal.
Scheduled oral arguments for Wednesday were canceled after the U.S. 7th Circuit Court of Appeals sent the case back to a lower court last week.
Rob Carr, CEO of the Illinois Retail Merchants Association, described this as a typical process since credit card companies are aiming to introduce new issues at the appellate level.
The plaintiffs, which include the Illinois Bankers Association, expressed their readiness to continue their legal challenge against the Illinois Exchange Fee Prohibition Act in district court, claiming that it violates federal law and that recent regulatory actions strengthen this position.
The case is now required to address a recent directive from the U.S. Office of the Comptroller of the Currency, which is part of the U.S. Department of the Treasury. This order, issued in April, exempted national banks from the law but not Illinois credit unions or community banks.
“Banks and credit card companies will go to great lengths to maintain their ability to impose high swipe fees, even lobbying the previous administration to overturn an Illinois law that was recently supported by a federal judge,” Carr stated in April.
The Electronic Payments Coalition, which includes Visa, Mastercard, and various banks, commended the OCC’s order and urged Illinois to retract the law, arguing it leads to significant market uncertainty by allowing only certain credit and debit cards to function.
As of now, it’s uncertain whether the law will actually be enforced as planned.
Ben Jackson, executive vice president of the Illinois Bankers Association, warned that the law might disrupt customer transactions and force small businesses to update their payment systems at a considerable cost. In response, Carr suggested that the “disruption” only happens when credit card companies and banks cause it deliberately.
He noted that credit card companies already adjust tax management on a state-by-state basis, so complying with the law shouldn’t be overly complicated. “They manage percentages differently, moving numbers around as needed,” he remarked.
2 Bears Tavern Group, which operates five bars in Northside, has no intention of altering its payment methods even after the law becomes effective, as pricing is already sufficiently clear, according to Mark Robertson, the group’s president. He claims that implementing this law is feasible without incurring additional costs.
“That Money Isn’t Ours.”
As this legal situation unfolds, small businesses are grappling with daily credit card fees. For instance, Minyori, a family-owned Taiwanese restaurant, has stopped allowing customers to split bills across multiple credit cards. They face a flat fee for every swipe, plus a percentage based on the total.
“In our industry, profit margins are incredibly slim, making swipe fees a significant burden,” explained X. Wang, the restaurant’s general manager. “Almost all our transactions are made with credit cards, so this is a recurring cost.”
Similarly, Potash Market, a 75-year-old family-operated grocery business, is feeling the strain from rising inflation and competition from larger supermarkets. Art Potash, the owner, described swipe fees as “an obstacle that increases operational costs and is factored into the prices we set.” He believes if more customers understood that taxes were subject to additional fees, they might support the legislation.
Potash finds it unfair that retailers end up paying credit card fees on top of the sales tax they’re responsible for collecting. “We’re doing a service for the state of Illinois, collecting taxes on their behalf. It’s not our revenue,” he stated, emphasizing that this predicament feels like punishment for those following the rules.
As credit card usage rises, the associated fees become a more significant burden for small business owners. A decade ago, 2 Bears conducted less than half of its transactions via credit cards; now, that figure has surged to nearly 99%, with the company projected to incur over $200,000 in credit card fees this year.
Many businesses are obliged to settle credit card bills using employee tips; even though employees can deduct these fees from their tips, 2 Bears opts not to do so. “That money isn’t ours. We’re merely intermediaries for other parties, like employees and the government,” Robertson explained.
Yet, with a growing number of tipped employees, 2 Bears might soon have to consider deducting swipe fees from those tips. Credit card fees, he noted, are largely beyond the control of businesses—options boil down to either passing them on to customers or rejecting card payments altogether. Increasingly, businesses are choosing to transfer those costs to consumers.
These challenges come amidst ongoing inflation woes that persisted past the pandemic, while consumer spending seems to be declining. Combined with a regulatory atmosphere in Chicago that many view as unwelcoming to small enterprises, the economic outlook seems less than favorable according to Robertson.
He remarked that Illinois’ swipe fee law stands out as “one of the few positive pieces of legislation for the hospitality sector from local and state authorities in recent years.” Many small operations, Robertson claims, are “nearing a breaking point due to relentless inflationary pressures,” with this law aiming to address those costs.
