Three consequences of Illinois’ interchange fee law

In my new CEI paper, I examine the Illinois Interchange Fee Prohibition Act and what policymakers can learn from previous efforts to restrict interchange fees. These are fees paid by a merchant’s acquiring bank to a cardholder’s issuing bank whenever a debit or credit card is used. There are three main takeaways.

The first is that consumers typically do not receive the promised benefits. Interchange fees help support the payment systems that make card transactions secure, convenient, and efficient. When lawmakers restrict those fees, consumers are likely to see fewer services, reduced rewards, and higher costs on other financial services. As I argued recently in the Chicago Tribune, evidence from past interchange fee restrictions offers little reason to expect a different outcome for Illinois’ consumers.

The second is that financial institutions bear significant costs. The Illinois law would impose new compliance requirements, operational complexities, and transaction-processing challenges. While large financial institutions may be able to absorb these burdens, community banks and credit unions are likely to face disproportionate costs. In more severe cases, these pressures could make continued participation in card networks financially unsustainable for smaller institutions.

The third is that the biggest winners are likely to be the largest retailers. While the law is marketed as a benefit for merchants broadly, the largest gains will flow to high-volume national chains such as Walmart, Amazon, and Home Depot. For many small businesses, any gross savings from lower interchange fees are likely to be offset by compliance and implementation costs. Many merchants may therefore see little net benefit or even a net loss.

Interchange fee restrictions fail to function as broad consumer protection measures. They tend to shift value toward the largest retailers while leaving consumers, community financial institutions, and smaller businesses to absorb the costs. Whether in Illinois or elsewhere, this outcome should give policymakers reason to pause and ultimately not adopt similar restrictions.

If you want to see the analysis in full, you may read the paper here.