The State of Illinois has garnered national attention for reasons that the financial services industry doesn’t love. Last year, the state passed the Illinois Interchange Fee Prohibition Act, which required that no portion of the interchange fee for any consumer transaction be charged on the portion of the sale subject to state sales tax. This law fundamentally changed the way financial institutions, including credit unions, could levy interchange fees.
The law was met with near immediate pushback from participants in the financial services industry. Both banking associations and credit union associations filed suit against the State of Illinois, alleging that the “law would not only throw well-operating payment card systems into chaos, it would also undermine the significant benefits, safety, and security that payment card systems provide to all participants.” Collectively, the associations asked the court for a permanent injunction.
Illinois state court did not agree with the financial institutions and ruled to uphold the law. However, the court did strike a portion of the law which would have limited the use of transaction data by banks, networks and other entities. Predictably, following the ruling, the banking and credit union associations filed for appeal.
In the most current update to this legal saga, the Attorney General (AG) for the State of Illinois has filed its response to the appeal. The response centers on the argument of preemption. The doctrine of preemption governs whether the law of a particular jurisdiction essentially came first. Accordingly, in statements made in the brief, the Illinois AG purports that the state law isn’t preempted by the National Bank Act, as the state law does not constrain national banks’ authority to establish or collect interchange fees from their customers. The AG’s brief continued by stating, “[s]tates remain free to regulate banks in even-handed ways, even if those regulations affect or impose costs on financial institution.”
In addition to the appeal filed by bank and credit union associations, the case has also seen filings of amicus briefs. The briefs have been filed by “allies” of the financial industry and have included the Office of the Comptroller of the Currency (OCC), 10 former OCC officials, the Electronic Transactions Association and the Electronic Payments Coalition. According to the amicus brief filed by the former OCC officials, “Card networks are ‘critical’ to card lending and deposit services powers, and the Illinois law ‘significantly interferes’ with those powers.”
The Illinois law is scheduled to take effect July 1 after legislators in the state voted last year for a one-year delay.
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