Colorado’s New Bill on Interchange Is a Test Case for Unintended Consequences

Colorado just passed SB26-134, which prohibits credit and debit card networks from charging interchange fees on the sales tax portion of transactions within the state. (Interchange fees are paid by a merchant’s bank to a cardholder’s bank when processing card transactions.) Retailers and restauranteurs have celebrated this as a victory, arguing that the bill will save merchants money. But while the bill’s intention may be sympathetic, its execution is a cautionary tale.

Gov. Jared Polis, who has yet to sign the bill into law, should review the federal government’s poor track record on this issue before mandating that private financial institutions solve a problem of the state’s own making.

The Realities of Interchange Regulation

In 2010, Sen. Dick Durbin (D-Ill.) attached an amendment to the Dodd-Frank Wall Street Reform Act capping debit card interchange fees at roughly $0.22 per transaction—about half the prevailing rate at the time. The premise was similar to Colorado’s current bill: Capping fees for merchants will allow savings to flow to consumers in the form of lower prices.

However, multiple studies—including one from the Federal Reserve Bank of Richmond—concluded that merchants did not pass the savings on to consumers. In fact, the study found that more retailers raised prices following the Durbin Amendment than lowered them. Meanwhile, the banks financially hit by the mandate had to recoup their losses elsewhere. This resulted in the elimination of free checking accounts, higher minimum balance requirements, and increased maintenance fees, in addition to a complete dismantling of debit rewards programs. The Durbin Amendment did not benefit those it purported to help; instead, it transferred wealth from community financial institutions and low-income households to large corporate retailers.

Now Colorado is legislating based on the same assumptions that failed at the federal level, but with a state-specific twist.

A New Mandate on Merchants

One of the bill’s particularly remarkable provisions requires businesses with more than 500 employees to apply any savings from the law toward consumer price reductions or employee wages and benefits. It appears the Durbin lesson was not entirely lost on Colorado’s legislature, given their decision to stack mandates on top of mandates. But legislating the pass-through does not fix the mechanism that failed to produce one.

In apparent recognition that the Durbin Amendment did not result in customer savings as intended, the Colorado Legislature has put an untested mandate in place that could ultimately harm merchants via compliance costs and legal risk.

Government’s Failure to Look in the Mirror

The underlying issue of merchants paying fees on monies remitted to the state is one Colorado’s legislature has carefully avoided confronting: Sales taxes are a public policy instrument. If the burden of sales tax and its collection on merchants is unjust or excessive, the remedy lies with the legislature itself—not with mandates on the free market.

Colorado collected $4.7 billion in sales tax revenue in 2024. The state has the authority to reduce sales tax rates, create exemptions for small businesses, or allow fee retention in exchange for serving as an unpaid tax collector in the form of a “vendor discount.” Common in many U.S. states, vendor discount programs allow merchants to keep a portion of the sales tax they collect in exchange for the efforts of collecting them and the fees paid. Colorado previously had such a program; however, it was quietly eliminated in 2026 for budgetary reasons. Instead of addressing its budget, Colorado’s interchange law passes the financial burden of sales tax processing on to financial institutions.

Currently, the total amount of interchange fees in Colorado comes to about $200 million annually (a relatively small portion of the state’s total sales tax revenue). But legislators have chosen to force private financial institutions to restructure a global payment system at their own expense—a choice made without evidence that savings will reach consumers, without the infrastructure necessary to separate out the tax portion of a transaction, and without accounting for disruption to the tourism economy that funds much of Colorado’s own tax receipts. Meanwhile, the state ensured it retained every penny of sales tax collection in a reversal from previous policy.

While the legislation may purport to address a real problem, the solution is backwards. Mandating that private actors solve this issue rather than modifying existing policy will only produce further negative externalities. Eventually, government will assume it needs to step in further, creating a never-ending attempt to solve problems that originated with the state itself.

Picking Winners Is a Losing Policy Strategy

The data on interchange fee regulation is clear: It transfers costs but does not eliminate them, producing winners among large retailers and losers among consumers and small banks. Colorado’s additional mandate requiring that fee savings be used for employee benefits and customer savings could prove a major burden, even among those who have benefited from previous interchange regulations (e.g., the big box merchants who retained fee savings following the Durbin Amendment).

Possible Outcomes

As of this publication, Gov. Polis has not yet signed the law. If enacted, it will certainly face legal challenges similar to those brought against Illinois’ interchange law.

Further complicating matters, federal regulators are engaged in preemption, blocking states from limiting interchange fees from nationally chartered banks. The Office of the Comptroller of the Currency issued an interim final order in response to Illinois’ interchange law, which should also apply to Colorado’s law. The rule asserts that interchange fees are protected under the National Bank Act and that they cannot be regulated at the state level. It also states that such mandates will cause too much tumult in the payments system and result in a highly fragmented fee structure should more states attempt to pass interchange fee legislation.

If the law survives these hurdles and takes effect in 2028, it will likely result in payment system chaos, disrupted rewards programs, and regulatory burdens on merchants who must prove that their fee savings are used in a state-approved manner.