I have many fond memories of growing up in the Chicago suburbs, including eating out at Lou Malnati’s, visiting Chicago museums on weekends and tagging along with my mom for grocery runs at Jewel-Osco. Back then, paying was simple: Swipe your card and move on. That same simplicity defines how consumers use cards today. But that everyday convenience is at risk for Illinois families because of a new law set to take effect on July 1.
The Illinois Interchange Fee Prohibition Act (IFPA) is a law that will change how fees are paid by merchants to accept cards in the state. Those fees are charged by banks to merchants every time a consumer uses a credit card. Called “interchange fees,” they make routine debit and credit card use possible.
Every time a consumer taps or swipes, that fee helps fund fraud protection, transaction processing and the convenience of using a card almost anywhere. Every card transaction connects a consumer’s bank and a merchant’s bank.
But merchants dislike having to pay the fee. And state lawmakers made it so the transaction will exclude taxes and tips from the swipe fee calculation. That may sound like a targeted solution, but in reality, it’s a bad one that will backfire.
Past efforts to limit interchange fees have come with unintended consequences. When Congress capped debit card interchange fees in 2010 under the Durbin Amendment, the expectation was that merchants would pass savings on to consumers through lower prices. The real-world results did not match that theory because, surprise, surprise, the merchants pocketed the savings.
A report from the Progressive Policy Institute found no meaningful evidence that these changes translated into lower prices for consumers. The promised benefits at the checkout line by and large failed to appear.
Banks, however, had to make up the lost income. Research from Penn State demonstrated that in the aftermath of the Durbin Amendment, banks reduced access to free checking accounts by roughly 40 percentage points and nearly doubled monthly account maintenance fees.
A George Mason University study showed similar adjustments, including tripled minimum balance requirements for fee-free accounts and doubled fees on standard checking products in the years after the policy took effect. Debit card rewards programs simply disappeared.
The lesson is straightforward. Consumers lose out twice — they don’t get the promised savings, and their banking costs go up.
That history matters for Illinois. While the IFPA takes a narrower approach by targeting interchange fees on taxes and tips, the underlying mechanism is the same. When interchange revenue is reduced, financial institutions respond by shifting costs elsewhere instead of absorbing them.
Illinois consumers may not see differences at the register, but the consequences will manifest elsewhere — including fewer rewards and benefits, higher banking fees, tighter credit access and less favorable account terms.
And because the national payments system isn’t currently set up to separate out taxes and tips, there will be a cost to rejiggering it — and the consumer will pay. To comply with the IFPA, banks will likely have to go back and adjust transactions after they are processed, instead of at the point of sale.
That structural gap matters because the IFPA imposes a $1,000 penalty per noncompliant transaction. Even small processing errors can create repeated compliance exposure, particularly for smaller banks and credit unions with thinner margins and limited compliance infrastructure.
The Woodstock Institute cautioned that this dynamic would likely cause “small, community credit unions and banks to exit payment processing entirely.” That would mean fewer credit cards from small financial institutions. For some households, the problem would shift from higher costs to less access.
The Illinois law predicament will raise a familiar question about whether people can keep their bank, similar to earlier assurances about keeping existing coverage under the Affordable Care Act that were ultimately named PolitiFact’s 2013 “Lie of the Year.” That experience is a reminder that policy assurances do not always survive real-world implementation, and Illinois is not immune to that dynamic.
Although I currently live near Washington, D.C., Illinois is still home. I care about its economic future. Unfortunately, good intentions cannot be a substitute for sound policy. The IFPA risks higher costs, fewer financial options and reduced access to banking services for Illinois families. Those outcomes are what will matter once the debate fades in Springfield.
In the real world, there is no such thing as a cost-free policy experiment. Government restrictions mean tradeoffs and costs, and the question is who will get stuck paying for them. With the IFPA, the answer is clear: It will be everyday Illinoisans who bear the heaviest burden.
Steve Swedberg is a policy analyst with the Competitive Enterprise Institute, a free-market public policy organization based in Washington, D.C.
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