Over the past few years, efforts to overhaul credit card regulations at the federal level – including the controversial Credit Card Competition Act (CCCA) – have stalled in Congress. However, states are stepping into the void, introducing legislation that could dramatically alter how consumers and businesses handle credit card transactions. Illinois is poised to be the first major test case, with a new law set to take effect in 2026 that prohibits financial institutions from collecting interchange fees on sales taxes and gratuities.
This shift matters because it disrupts a well-established system designed for security, fraud protection, and consumer rewards. If replicated across multiple states, it could fragment the U.S. payment landscape, making transactions more complex and potentially less secure. The broader trend suggests that as federal action slows, state-level interventions will become more common, creating a patchwork of regulations that businesses and consumers must navigate.
How Credit Card Transactions Work
Every credit card transaction involves multiple parties and fees. Merchants pay a small percentage of each sale – around 2% – to cover processing costs, fraud prevention, and funding consumer rewards programs (cash back, points, miles). This fee is split among the issuing bank, the payment network (Visa, Mastercard, American Express), and the merchant’s processor.
Consumers benefit from this system through fraud protection and the ability to earn rewards, while businesses enjoy a relatively seamless and secure payment process. The current model minimizes risk, especially compared to cash transactions.
Illinois’ New Law: A Complex Implementation
The Illinois Interchange Fee Prohibition Act (IFPA) aims to eliminate interchange fees on taxes and tips. This seemingly small change introduces significant logistical hurdles. Businesses would need to split transactions into multiple parts – one for the goods/services and another for taxes/tips – or risk losing a substantial portion of their revenue.
The law’s implementation is complicated further by the varying tax rates across Illinois’ 102 counties and numerous municipalities. Large retailers with extensive accounting teams are best positioned to adapt, while small businesses could struggle to absorb the added costs and complexity.
According to a study by the Electronic Payments Coalition, the largest 40 retailers in Illinois would capture nearly 40% of any interchange fee savings, leaving the state’s 1.3 million small businesses with the burden of compliance and minimal financial benefit.
Why Consumers Will Feel the Impact
The IFPA is likely to make credit card transactions more cumbersome for consumers. Restaurants, for example, might require customers to pay for food with a card and then provide cash or a check for taxes and tips.
Privacy is another concern. Itemizing transactions to avoid interchange fees could expose more consumer data to third parties. Despite these potential drawbacks, awareness of the law remains low. A recent Morning Consult poll found that only 31% of Illinois residents were aware of the changes, but opposition surged to 61% once informed.
The Broader Trend: States Testing New Limits
Illinois is not alone. Over two dozen states considered similar legislation last year, though none passed. However, jurisdictions like Colorado, Georgia, Pennsylvania, and the District of Columbia are still exploring regulations that could upend the credit card landscape.
The underlying issue is friction between federal and state-level regulation. Federal inaction on credit card reform has created an opening for states to experiment with their own rules, leading to a fragmented system where the convenience and security of payments may suffer.
Ultimately, the push for state-level credit card regulations is driven by a desire to lower merchant fees, but the real consequences could fall on consumers and small businesses. The global payments system works best when it’s consistent, and injecting state-level inconsistency could disrupt the very nature of how people pay and earn rewards.
