You might have come across ads warning of impending “credit card chaos” in Illinois this summer, but honestly, the situation is a bit more nuanced than that.
These ads, primarily pushed by the Electronic Payments Coalition, take aim at a 2024 law called the Exchange Fee Prohibition Act. This legislation prohibits banks, credit unions, and credit card companies from charging “swipe fees” on the sales tax portion of transactions and tips made with debit or credit cards.
While the law still permits these institutions to collect fees on the actual sale price of items, they argue that the bill creates significant hurdles and could lead to hefty penalties for non-compliance. As a result, there’s been a court challenge, and the law is under federal scrutiny.
So, what exactly is the “Exchange Fee Prohibition Law”? Why is it generating such controversy? And if it passes, when will it actually come into play?
Here’s a breakdown of what you should know:
What is the Exchange Fee Prohibition Act?
If you’ve shopped lately, you may have noticed that some places charge different prices depending on whether you’re paying with cash or credit. This usually comes with a 1-3% fee known as a “swipe fee,” which is set by financial institutions on card transactions.
Illinois aims to stop these companies from imposing fees on specific parts of transactions, like sales tax and tips at restaurants and other retail settings.
Why are financial institutions so opposed to this measure?
Banks argue that the current approach simply considers the total amount of a transaction when figuring swipe fees. If they have to separate the different parts of a transaction, it could mean consumers would either have to swipe their cards multiple times or pay cash for things like taxes and tips.
Moreover, they express concerns that the bill could undermine reward programs and hinder their ability to detect fraud.
Some experts, like those from the International Center for Law and Economics, suggest that while the intention is to shield merchants from sales tax or tip fees, the law would make it necessary for merchants to submit detailed tax and tip information at the time of payment, which could be cumbersome.
On the other hand, advocacy groups like the Illinois Retail Merchants Association argue that these fears are exaggerated. They claim that a software update—similar to the transition to chip cards—could make compliance manageable.
Rob Kerr, leading the IRMA, emphasizes that the bill could alleviate a significant cost burden for both businesses and consumers.
“We can’t promise that all prices will drop by the same amount, as plenty of factors influence pricing. But reducing costs in any way helps retailers keep prices more controlled,” he noted.
What’s the deal with the targeted advertising?
Illinois shoppers have definitely seen ads suggesting that there could be widespread turmoil if this bill takes effect by July 1. One ad ominously states, “Unless Springfield corrects this error, your debit or credit card might not be usable for tips or sales tax after July 1.”
The Electronic Payments Alliance, representing banks and the credit card industry, is investing millions into an ad campaign aimed at preventing this exchange fee ban from being enforced.
Kerr believes the campaign is misleading. “They’re really trying to create chaos themselves. There’s no need for that, and they’re just trying to instill fear in customers,” he argued.
Is there a legal challenge to the law?
Though the law is slated to go into action on July 1, it’s facing significant legal obstacles.
The Office of the Comptroller of the Currency issued a statement earlier this year asserting that Illinois lacks the authority to limit swipe fees for federally-chartered banks.
This law has also been contested in Illinois courts. A federal judge initially sided with the state, but the decision is under appeal and has been sent back to the district court for further consideration, according to legal sources.
