State Interchange Fee Legislation is a Strategic Threat
Created by Steven J. Berkowitz | Research Assistant: Claude AI
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Three strategic insights on the threat posed by State interchange fee regulations.
Interchange Fee Legislation as a Strategic Threat: Revenue, Operations, and the Advocacy Imperative
The Illinois Interchange Fee Prohibition Act and the legislation advancing in Colorado, Delaware, and Rhode Island represent a competitive positioning challenge that credit union boards must address with the same discipline applied to market share, product strategy, and capital planning.
The ABA Banking Journal reported on May 8, 2026, that following the Seventh Circuit remand of the Illinois IFPA litigation, Colorado passed its comparable bill and sent it to the governor. The common thread targets interchange fees on the tax and gratuity portions of card transactions, which requires processors and issuers to separate transaction components they currently treat as unified amounts. The technology and operational cost of that separation fall on institutions and their vendors. Separate state law approaches to the same problem will produce a multistate compliance matrix with different thresholds, exemptions, and effective dates.
PYMNTS noted on May 8, 2026, that the Seventh Circuit remand leaves every participant in the card ecosystem without definitive legal guidance as the July 1 Illinois date approaches. States observing the Illinois and Colorado precedents may advance their own bills, accelerating the formation of that multistate compliance matrix. Whatever the district court decides in Illinois will likely produce another appeal. The cycle of litigation, legislation, and uncertainty compounds the operational challenge.
The competitive dimension is direct. Interchange income funds fraud prevention technology, digital infrastructure, member rewards programs, and the operational capacity that distinguishes credit unions in the marketplace. Revenue compression from interchange restrictions reduces the resources available for those priorities. Larger banks operate with revenue diversification that absorbs interchange pressure with greater resilience. Community scale institutions that concentrate operational funding in payment fee income face margin compression with fewer strategic alternatives. State level legislative engagement represents the most direct form of protection available before laws pass, and that window in states now considering bills is open and will close.
Actions to Consider
• Present to your board a quantified analysis of interchange revenue as a share of total operating income and the modeled financial effect of restrictions covering tax and gratuity transaction portions across multiple states.
• Contact your state league to understand current advocacy resources and positioning on interchange legislation and commit your institution to visible and active participation.
Sources: ABA Banking Journal, May 8, 2026, http://bankingjournal.aba.com/2026/05/seventh-circuit-sends-illinois-interchange-litigation-back-to-district-court/
PYMNTS, May 8, 2026, https://www.pymnts.com/bank-regulation/2026/seventh-circuit-resets-illinois-swipe-fee-fight-as-july-1-deadline-looms/
Seventh Circuit Remands Illinois Interchange Fee Case as July 1 Deadline Stands
Strategic Summary
The United States Court of Appeals for the Seventh Circuit on May 8, 2026, vacated the district court decision in the challenge to the Illinois Interchange Fee Prohibition Act and remanded the case to the Northern District of Illinois for further proceedings. The ABA Banking Journal reported that the appellate court canceled oral arguments previously set for May 13 and returned the dispute to trial court weeks before the July 1 effective date of the Illinois law. The Seventh Circuit acted in response to an Office of the Comptroller of the Currency interim final order that concluded the Illinois law is preempted by the National Bank Act for national banks and federal savings associations, effective June 30, 2026. The district court must now evaluate how much weight to assign the OCC preemption action before issuing a new ruling. Banks, payment networks, processors, merchants, and credit unions operate in a period of legal uncertainty with the implementation date unchanged. A coalition of banking and credit union industry groups renewed its call for the Illinois legislature to repeal the statute, warning that implementation would create operational and financial disruption.
Why This Matters
Credit unions do not receive the same federal preemption protection the OCC order extends to national banks and federal savings associations, which means the district court outcome matters directly for credit union interchange revenue. Institutions that process card transactions at Illinois merchants face potential revenue loss and operational complexity if the law takes effect without protective legal relief. The timeline between now and July 1 leaves little room for a reactive response.
Actions to Consider
• Request a briefing from your payment processor and legal counsel on the specific interchange fee exposure your institution faces if the Illinois law takes effect on July 1 without legal relief for credit unions.
• Brief your board on the litigation status and financial exposure in sufficient detail to support the governance responsibility directors hold.
Source: ABA Banking Journal, May 8, 2026, http://bankingjournal.aba.com/2026/05/seventh-circuit-sends-illinois-interchange-litigation-back-to-district-court/
Colorado Advances Interchange Fee Restriction Bill, Confirming a Multistate Movement
Strategic Summary
PYMNTS reported on May 8, 2026, that the Colorado General Assembly passed legislation modeled on the Illinois Interchange Fee Prohibition Act and sent the measure to the governor, following both chamber approval. The Colorado bill bars card networks from charging interchange fees as a percentage of gross transaction amounts that include a sales tax portion and includes a provision to prevent circumvention of the restriction. The bill passed both chambers in the same week as the Seventh Circuit issued its remand in the Illinois litigation, with Delaware and Rhode Island advancing comparable measures in their own legislatures. The development confirms that the Illinois law represents the leading edge of a multistate legislative movement. Financial institutions that process card transactions across state lines face the prospect of a payment fee compliance framework that varies by state jurisdiction, tax content of the transaction, and presence of a gratuity.
Why This Matters
A multistate patchwork of interchange fee restrictions imposes compliance complexity and revenue uncertainty on institutions of every size. Community scale institutions that depend on interchange income to fund member services, digital infrastructure, and fraud prevention face margin pressure they have not planned for, while the technology changes required to comply with state level transaction calculations will require vendor investment. The time to engage state level policymakers is before legislation passes.
Actions to Consider
• Monitor the status of interchange fee legislation in your state and in states where your members transact frequently.
• Quantify the annual interchange revenue your institution collects and model the financial effect if restrictions covering sales tax and gratuity portions of transactions take effect across two or three additional states.
Source: PYMNTS, May 8, 2026, https://www.pymnts.com/bank-regulation/2026/seventh-circuit-resets-illinois-swipe-fee-fight-as-july-1-deadline-looms/