Report: Government limit on credit card interchange fees undermines consumers, small businesses 

A new Competitive Enterprise Institute report examines an Illinois law that will limit credit card interchange fees paid by merchants to the banks and credit unions that issue such cards. The report argues that the Illinois Interchange Fee Prohibition Act (IFPA) will raise costs for consumers, burden community banks and credit unions, and give larger retailers an advantage over smaller competitors. 

The report, The Hidden Costs of Interchange Fee Bans, by CEI Policy Analyst Steve Swedberg, examines the economic, operational, and legal consequences of prohibiting interchange fees on the tax and tip portions of credit card transactions. 

“Interchange fee critics claim the ban will help merchants, but in practice it is likely to make consumers, financial institutions, and many merchants worse off.” said Swedberg. 

The report points to the experience of the federal Durbin Amendment, which capped certain debit card interchange fees. Research found that banks responded by reducing free checking accounts, increasing fees, and scaling back rewards programs, while consumers saw little evidence of lower retail prices. 

The report also warns that compliance with the Illinois law will be costly and complex. Merchants would continue paying interchange fees upfront and then seek reimbursement through a process requiring detailed transaction records, claim submissions, and verification. Those burdens are likely to fall hardest on smaller businesses and community financial institutions that lack extensive compliance infrastructure. 

Finally, the report argues state-by-state restrictions would threaten the uniform national payments system that allows consumers to use payment cards seamlessly across the country. If multiple states adopt different interchange fee restrictions, the result could be a patchwork of compliance requirements, increased costs, and needless complexity in the payments system. 

Implementation of the law has been postponed until June 1, 2027. “Illinois lawmakers have a chance to repeal, not just postpone, the ban and spare consumers, small businesses, and financial institutions from its unintended consequences,” said Swedberg.