Illinois should abandon interchange law

Jodie Kelley is CEO of the Electronic Transactions Association, which represents the payments technology industry.

Many aspects of modern life are taken for granted. Turning the key in the ignition starts the car. Flipping a switch brings light to a room. And when we tap, insert, or enter our credit or debit card online, we can complete a secure purchase in seconds.

Yet the Illinois General Assembly decided to unilaterally alter this complex, well-functioning, and secure system by passing the Illinois Interchange Fee Prohibition Act this year, which exempts sales taxes and tips from card transactions. If that sounds like a terrible idea, it is.

Thousands of companies have invested years of work and capital to make payments simple. This system is highly regulated, fiercely competitive, largely invisible to consumers, and remarkable in both scope and scale. It processes millions of transactions every second, enabling people to buy groceries, pay for gas, order school supplies online, and send money to friends and family—all without hassle or worry.

The benefits extend beyond consumers. Easy electronic payments allow businesses—especially small ones—to reach more customers, expand their markets, and streamline operations. Electronic payments laid the groundwork for online shopping.

Federal Reserve Board Chair Jerome Powell has called the U.S. payments system “safe, effective, dynamic, and efficient” in serving households and businesses across the economy.

Nevertheless, the General Assembly chose to unilaterally change this system by exempting sales taxes and tips from card transactions. The decision was not made in the light of day but in a closed-door deal struck in June, just before the Legislature adjourned. No hearings were held, and no conversations occurred with the companies that make payments possible before lawmakers made this consequential choice.

Worse, the measure will almost exclusively benefit corporate mega-stores that lobbied for the change and rake in billions of dollars in profits each quarter. Everyone else will be shortchanged.

Illinois’ decision will force the state’s 1.3 million small businesses to spend hundreds of millions of dollars in the first year alone, with additional costs in future years to update technology and ensure compliance. These added expenses will hurt small businesses by increasing their bottom-line costs, making it harder to compete, and reducing the time and money available for growth-driving innovations.

The law suggests that small businesses can request refunds from their payments processor. But what does that look like in practice? Gathering receipts in a box and shipping them off? How much extra burden does that place on a small business owner?

Additionally, customers could find themselves unable to use a credit or debit card to pay for taxes and tips. Imagine buying a hot dog, pulling out your credit card to pay, and then learning you need cash to cover the taxes and a tip.

Significantly, the law will also weaken the ability of all players to fight fraud. It forces changes to a system that currently identifies threats instantly and protects consumers from harm, including unauthorized charges.

Illinois is the only state in the country to take this action—and for good reason. The law is deeply flawed legally and should be struck down.

Given what’s at stake, it’s no surprise that a diverse group of businesses oppose the act. Even the Comptroller of the Currency, the independent bank regulatory agency at the U.S. Treasury Department, has urged the state to reverse course. In a brief last week, the Comptroller said Illinois’ act “is an ill-conceived, highly unusual, and largely unworkable state law that threatens to fragment and disrupt this efficient and effective [banking] system.”

For these reasons, the courts and the Illinois legislature should ensure the law never takes effect.