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Illinois' landmark credit card fee law prompting strong opposition – Chicago Tribune

Illinois lawmakers last month, during the legislative spring recess, became the first state in the nation to ban banks and credit card companies from charging retailers seemingly small fees for sales taxes and tips.

But since Gov. JB Pritzker signed the ban into law, financial institutions that opposed the measure have stepped up their opposition and become more vocal, arguing that the measure is not only bad for them but will also create headaches for consumers.

Last week, an industry group representing credit card companies and banks Advertise online In Illinois, the ban declared that “people may be forced to pay for some of their purchases with cash” and printed ads stating that “Illinoisans are banned from paying tips with their credit cards.”

While some supporters, including many Democrats and the Illinois Major Retailers Association, say those claims are overstated, the new law sets up a years-long battle between the state and financial institutions, which argue the reforms are not only a bad idea but also unrealistic because they must be implemented in just over a year.

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

Credit card companies and financial institutions currently charge retailers and restaurants a fee based on the total transaction amount of merchandise, taxes and tips when a consumer uses their card. The new law aims to lower the amount that credit card companies can charge retailers by prohibiting financial institutions from charging so-called interchange fees on the tax and tip portions of customers’ bills.

Both sides claim they are in the consumer’s interest. Supporters of the ban say interchange fees are hidden charges that are passed on to customers. Opponents say the law would be confusing for anyone who uses a credit or debit card in Illinois, could force separate transactions to buy goods and pay taxes and tips, and would create a paperwork nightmare for small businesses.

Sen. Dick Durbin, an Illinois Democrat who has led the charge for credit card reform at the national level, said earlier this month that he supports the Illinois ban. Durbin has introduced federal legislation that would increase competition between credit card processors Visa and MasterCard to lower transaction fees.

“I think what Illinois is doing is good. … I think they’re both steps in the right direction,” Durbin said of his bill and the Illinois law.

The ads, paid for by the Electronic Payments Coalition, a national trade group for credit card companies and other financial institutions, warn that a new Illinois law regulating credit card fees will cause inconvenience to customers. The coalition began running the ads last week as part of a six-figure campaign. (Electronic Payments Coalition)

The Illinois Retailers Association also supports the new law, which would save retailers facing about $101 million in tax increases included in Illinois’ recently passed budget.

IRMA president Rob Carr said the deal would require financial institutions and retailers to change the way they did business, but many of the retail association’s members were small businesses who supported the change because it would reduce fees.

“They’re going to have to make some changes, but it will lead to a more equitable system,” Carr said in an interview before the bill was passed.

According to the National Retail Federation, credit card fees average just over 2% of a retail transaction, meaning that about $98 of every $100 in sales goes to the retailer.

Banks and credit card companies have generally opposed the law, but one of their biggest sticking points is that the companies would have to overhaul their systems by July 2025 to comply with it. That would mean Illinois would be the first state to require distinctions between items, taxes and tips in consumer retail transactions, which would require complex software changes, the groups said.

If the new system isn’t in place by July 2025, they say, it could cause confusion and force consumers to pay taxes and tips in cash because credit card companies are unable or unwilling to process them.

Former Republican state senator Steve Rauschenberger is a consultant for the Electronic Payments Coalition, a trade group that represents the interests of large financial institutions including Visa, MasterCard, Chase, Wells Fargo, Bank of America and Capital One.

Rauschenberger said even if the industry could develop and implement new software to separate different parts of a transaction — “and I think that’s a big if” — that could take three to five years, far longer than the new law’s scheduled implementation date.

“Without a serious effort to repeal this new law, as the effective date approaches, card-issuing banks and credit unions will be forced to notify Illinois’ approximately 7 million cardholders of the changes required by Illinois’ new law,” Rauschenberger said, adding, “There will be an outcry.”

In response to financial institutions’ concerns, Carr said, “It’s ridiculous for credit card companies and banks to claim they can’t find a way to distinguish between taxes and gratuity charges. They make the same claim every time there’s a change in how debit or credit works.”

Referring to Governor Durbin’s bill before the U.S. Senate, Carr said credit card fee reform has been gaining momentum nationwide in recent months, with Illinois leading the way.

Carr said his union members support the measure, but at least some small business owners are siding with the financial institutions.

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

Alex Cabrera, owner of Lalo's Restaurant in Chicago on June 21, 2024. (Courtesy of Vincent D. Johnson/Chicago Tribune)
Alex Cabrera, owner of Lalo’s restaurant in Chicago on June 21, 2024. (Courtesy of Vincent D. Johnson/Chicago Tribune)

Jose Garcia, president of Northwest Community Credit Union and a member of the Illinois Federation of Credit Unions’ board of directors, added in a joint interview with Cabrera that Chicago business owners currently know little about how the changes will be implemented.

The possibility of requiring cash for transactions is of particular concern to Cabrera and other business owners, who see it as an inconvenience for tipping customers and a burden on businesses.

Cabrera said there are many unanswered questions about how the change will be implemented, but he expects it will be “burdensome. It will be onerous, for sure.”

Even if credit card companies continue to allow taxes and tips to be paid, customers may have to swipe their cards multiple times, according to a letter to Governor Pritzker sent by financial institutions who unsuccessfully lobbied the governor to veto the provision earlier this month.

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

Opponents also complain that the provision was introduced just days before the Illinois Legislature’s spring session was to close.

A spokesperson for the governor said in an email last week that after IRMA was proposed, legislative leaders and Governor Pritzker agreed to include the provision in a broader revenue proposal.

The change was proposed by retailers because of a separate tax increase on retail businesses scheduled in another part of the revenue package, said state Rep. Kelly Burke of Evergreen Park, who introduced the bill. The tax increase would cap retailers’ discounts at $1,000 a month, up from the 1.75% of sales tax they currently collect in the state.

Burke said fast-tracking a comprehensive bill at the end of a session “shouldn’t be news to anybody.”

“Things come together quickly,” she said.

State Rep. Kelly Burke (D-Evergreen Park) speaks at the Chicago School of Agricultural Sciences on Sept. 2, 2022. (Courtesy of Michael Guard/Chicago Tribune)
State Rep. Kelly Burke (D-Evergreen Park) speaks at the Chicago School of Agricultural Sciences on Sept. 2, 2022. (Courtesy of Michael Guard/Chicago Tribune)

But when asked about the possibility of some kind of compromise with financial institutions, Burke did not rule it out. The General Assembly will meet again in the fall to consider the veto, but he said it is not uncommon for measures to be amended or their implementation dates pushed back.

“If we finally decide to call the bluff of the credit card companies and the banks and say, ‘We think you can do this well enough,’ Illinois will be the first to do it,” said Democratic Rep. Margaret Croke, who still expressed concerns about the credit card changes during a committee hearing on the day of the vote.

“I don’t mind Illinois being the first to do this, but not without this much information,” she said, partially echoing the arguments of some opponents who have called for an investigation of the issue rather than implementing reforms.

Croke, who still voted for the revenue increase, said he worries the bill would leave Illinois open to costly lawsuits.

“When you work with well-funded companies that are resistant to change without having a robust argument and a thoughtful conversation about why change is necessary, their first reaction is to sue,” Croke said in an interview earlier this month.

The moderate congresswoman from north Chicago said she also had privacy concerns: If credit card issuers and processors were to itemize transactions, she speculated, it could create a trove of valuable data about Illinois consumers’ purchases.

Rauschenberger, a former Republican lawmaker, said credit card companies worry the Illinois law would open a “Pandora’s box” of regulations and pose a potential “existential threat” to the current payments system.

Days before signing the revenue bill, Governor Pritzker said he didn’t expect any changes, but said the credit card issue was “of course open to discussion, reconsideration and conversation at any time, and we have time to do that over the remainder of the year.”

Tribune reporter Jeremy Gohner contributed..