The regulatory landscape is shifting once again, and this time interchange is in the spotlight. The Interchange Fee Prohibition Act, introduced in Illinois, has raised significant concerns across the banking industry. The act signifies a potential shift in the regulatory landscape for financial institutions nationwide, with implications that could extend beyond state lines. Financial institutions must reconsider their revenue strategies and prepare for broader legislation challenges that may lie ahead.
What is the interchange rule in Illinois?
The Interchange Fee Prohibition Act (IFPA) prohibits the collection of debit and credit card interchange fees for sales taxes, excise taxes and gratuities if the merchant informs the acquiring financial institution of the amount of these taxes and gratuities. This piece of Illinois legislation, set to take effect in July 2025, will impact financial institutions, processors, merchants, credit and debit card issuers, and payment card networks. Additionally, this complex ruling will require financial institutions to overhaul technology without clear guidance on how to do it.
If the act passes, it will come at a large cost, especially to smaller financial institutions in the state who do not have the resources to implement it and who are more reliant on interchange revenue. Without this revenue stream, banks and credit unions may have to compensate for the loss by reconsidering the way they structure consumer accounts or increasing fees, both of which will directly affect the customer/member.
Did banking associations sue Illinois over the first-of-its-kind change to credit card fees?
The American Bankers Association, Illinois Bankers Association, America's Credit Unions, and Illinois Credit Union League have filed a lawsuit with the state of Illinois to challenge this law. The lawsuit claims the IFPA will disrupt the payment system, reduce the benefits of credit and debit cards for consumers and businesses, interfere with the federal government's authority over certain banks and credit union, and require institutions to invest hundreds of millions of dollars to comply with the law.
The U.S. Office of the Comptroller of the Currency has also joined the legal battle citing that the IFPA threatens "safe and sound banking" by undermining fees that cover transaction costs and protect against fraud.
What are the national repercussions of the IFPA?
Understandably, banks and credit unions are following this development as the potential ripple effects of this act could extend far beyond Illinois. It’s important that financial institutions monitor the progress of IFPA and brace for potential expansion. If more states follow Illinois’s lead, financial institutions may need to adjust their business models to account for the potential loss in revenue. Banks and credit unions also need to prepare for the reputational risk of new fee structures and higher costs to consumers.
Any financial institution impacted will need a comprehensive strategy to navigate this new norm. Banks and credit unions may need to revisit their pricing strategies, scale down rewards programs, or introduce new products to attract and retain customers/members. Identifying new revenue streams will be critical for long-term success.
While the law presents significant challenges, it also offers an opportunity for smaller financial institutions, which will be most affected, to promote their biggest strengths – personalized service and relationship banking. Prioritizing the customer experience and offering competitive products will help add differentiation in a changing marketplace. Additionally, leveraging available technology solutions can help mitigate the impact.
Conclusion
The Interchange Fee Prohibition Act could reshape the financial landscape, not only in Illinois but nationwide. Every financial institution should stay informed on the latest developments surrounding this legislation. Banks and credit unions who proactively prepare for any proposed legislation will be better positioned for the future.
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