Myth vs. Fact: State Interchange Regulation and the Case for Federal Uniformity
States across the country have waded into interchange fee regulation in recent years. These are the charges that banks and card networks collect from merchants on every card transaction. Illinois passed the first bill to become law on the issue in June 2024, the Interchange Fee Prohibition Act (IFPA). The IFPA bars financial institutions, card networks, and processors from collecting interchange on the sales tax and tip portions of card transactions. Other states have attempted similar fee carveouts, including unsuccessful efforts by lawmakers in Texas, Arizona, and Colorado.
The IFPA was immediately challenged in court by banking associations, and later curbed by rulemaking from the Office of the Comptroller of the Currency (OCC) which stated the law could not apply to nationally chartered banks. Shortly after, a federal judge issued an injunction siding with the OCC rulemaking. The Illinois legislature has since pushed the effective date of the IFPA to July 1, 2027 while the litigation plays out.
If left unchecked, the IFPA and similar bills would result in a multi-state patchwork of price controls on a payment infrastructure that is inherently national in scope. Before legislatures go further, it is worth separating fact from fiction on what the law actually permits, and what sound policy actually requires.
MYTH: State interchange regulation is a legitimate exercise of consumer protection.
FACT: It is a price control dressed up in consumer and business-friendly language.
The National Bank Act (NBA), enacted in 1864, established a system of federally chartered national banks governed by federal law and supervised by the OCC. The Act’s preemption framework was deliberately designed to ensure that nationally operating institutions could function under a single, coherent regulatory regime rather than bend to the differing whims of various state legislatures. The Supreme Court has repeatedly affirmed that states may not “significantly interfere” with a national bank’s exercise of its federally authorized powers, including its ability to set and collect fees for its services.
Interchange fees fall within those powers. When Illinois passed the IFPA, it was dictating specific price terms to banks and card networks for a defined category of transaction. The NBA was designed precisely to prevent this type of direct regulation, and the injunction issued in the Illinois case reflects this reality.
MYTH: A patchwork of state rules is a reasonable alternative to federal inaction.
FACT: Patchwork regulation imposes enormous costs with no corresponding consumer benefit.
Proponents of state interchange legislation argue that if Congress chooses not to intervene in interchange markets, states must fill the void. This, however, gets the analysis exactly backwards. The payment card system is a national network. The economics of interchange, including how fees are set and how revenue flows between issuers, networks, acquirers, and processors, cannot be sensibly managed on a state-by-state basis. If a bank issues a card in Illinois, it has no practical way to distinguish which portion of a given transaction on that card represents sales tax or gratuity, much less strip that amount from the fee calculation and do so differently in each state that passes similar laws.
The compliance costs of such a regime would be staggering, and they would not be easily absorbed by large financial institutions. They would be passed on to consumers through reduced card rewards, higher fees, and diminished access to credit, particularly for lower-income households and the customers of smaller community banks and credit unions that lack the scale to absorb new regulatory burdens, precisely as evidenced by price controls on debit interchange. Big box merchants in favor of these laws will be fine. Their customers may not be.
MYTH: If states can’t regulate interchange, consumers and businesses have no recourse against excessive fees.
FACT: Competitive markets already discipline fees, and government intervention has only made things worse.
Interchange fees are not set arbitrarily by banks immune from market pressure. Card networks and issuers compete for both merchant acceptance and consumer use. Businesses negotiate rates, especially at scale, and networks have introduced meaningful downward pressure on fees over time. Where markets are allowed to function, consumers and businesses benefit.
Government intrusion significantly alters this relationship, as the Durbin Amendment and its myriad negative effects proved. Sold as relief for merchants and consumers, it delivered neither. Large merchants captured most of the savings and passed little to nothing along to shoppers. Meanwhile, banks offset lost revenue by raising account fees, eliminating free checking, and cutting back rewards programs, ultimately at a disproportionate impact to lower-income consumers. The attempt at protection only made things worse for the people it purported to help.
State-level pile-ons would repeat that mistake while compounding the dysfunction. A patchwork of fifty different price control regimes would raise costs for everyone while delivering the same illusory savings. Federal preemption prevents a harmful race among state legislatures to impose the most aggressive price controls on a system that functions precisely because it operates uniformly at scale.
Policymakers Should Proceed With Caution
The Illinois IFPA and the wave of copycat legislation it has inspired represent a fundamental misunderstanding of both federal banking law and sound economic policy. The National Bank Act exists precisely to prevent states from balkanizing the national banking system with conflicting local mandates. Courts appear increasingly likely to enforce that limit. Lawmakers in states considering similar bills should heed the warning that the legal exposure is substantial, the economic case is weak, and the consumers these laws claim to help will likely bear the costs.