Merchants in Illinois and potentially several other states are about to lose the fee relief their legislatures promised them. Two federal regulators have issued interim final rules asserting that national banks and federal credit unions answer only to federal authority when setting interchange fees, effectively stripping states of the power to cap swipe fees on card transactions. The actions target Illinois’ Interchange Fee Prohibition Act directly, but the legal reasoning extends to any state law that tries to regulate what federally chartered institutions charge.
Two federal agencies claim sole authority over interchange fees
The Office of the Comptroller of the Currency (OCC) moved first and in force. In an interim final rule, the agency reaffirmed that national banks have longstanding authority to impose charges and fees associated with their lending and deposit activities, including fees that are calculated or collected by third parties such as card networks. By characterizing interchange as part of a bank’s federally authorized fee structure, the OCC positioned swipe fees squarely within the sphere of federal banking powers that states cannot directly limit.
At the same time, the OCC issued a companion order declaring that national banks and federal savings associations are not required to comply with Illinois’ Interchange Fee Prohibition Act. In that order, the OCC invoked the doctrine of federal preemption: when Congress grants a power in a federal charter, a state cannot nullify or significantly impair that power through conflicting statutes. The agency’s explanation, released alongside its broader interim fee guidance, leaves little doubt that it views interchange as integral to the business of federally chartered banks.
The National Credit Union Administration (NCUA) quickly aligned its position. Through an interim final rule of its own, the NCUA asserted that federal credit unions have exclusive federal authority to levy non-interest charges and fees, specifically identifying interchange as one such fee. In its public statement, the agency emphasized that state laws cannot dictate whether or how federal credit unions charge these amounts, underscoring that Congress designed the federal charter to operate independently of state-by-state fee controls. The NCUA’s move, described in its recent announcement, effectively shields most federally chartered credit unions from Illinois’ restrictions.
Together, the OCC and NCUA actions cover the vast majority of card-issuing institutions that process transactions for Illinois merchants. While some state-chartered banks and credit unions remain subject to state law, the regulators’ message is that when a card is issued by a federally chartered institution, the fee rules are set in Washington, not Springfield or any other state capital.
Illinois’ tax-and-tip fee ban triggered the federal response
The Illinois Interchange Fee Prohibition Act (IFPA), codified as 815 ILCS 151, seeks to carve out taxes and gratuities from the base on which interchange is calculated. Under the law, if a restaurant bill totals $50 with $4 in state and local taxes and a $10 tip, processors may assess swipe fees only on the $36 attributable to the underlying goods or services. The statute also limits certain uses of transaction data by payment networks, aiming to curb what state lawmakers described as “fee layering” and data-driven pricing practices that squeeze small merchants.
Supporters in Illinois framed the IFPA as a targeted way to help businesses that cannot easily pass higher payment costs on to customers. Restaurants, bars, and hospitality operators often face interchange on every dollar that passes through the register, even when a portion of that total is merely being collected on behalf of governments or passed directly to workers as tips. By excluding taxes and gratuities, the state hoped to reduce effective fee rates without banning interchange altogether.
Federal banking law, however, leaves little room for states to dictate the terms of charges imposed by federally chartered entities. The OCC’s interim actions characterize the Illinois law as a direct attempt to cap or restructure a fee that national banks are federally authorized to collect. In the agency’s view, conditioning the collection of interchange on the composition of a transaction-by disallowing fees on taxes and tips-amounts to a substantial interference with a core banking power. That conclusion drove the OCC’s decision to preempt the IFPA rather than accommodate it.
What state-level fee caps face after the federal rules land
The most immediate consequence is that enforcement of the Illinois statute will be fragmented at best. Because national banks and federal credit unions account for a dominant share of card issuance, most transactions at Illinois merchants will involve cards tied to institutions that now claim immunity from the IFPA. The state’s attorney general and financial regulators must decide whether it is worth pursuing compliance from a narrower set of state-chartered issuers, knowing that many merchants will see little change in their overall fee burden.
Other states that have explored similar tax-and-tip carveouts-or broader caps on interchange-are watching closely. The OCC’s reasoning does not stop at Illinois’ borders; it signals that any state law directly limiting the amount or structure of interchange charged by federally chartered institutions will likely be deemed preempted. Legislatures contemplating new swipe-fee rules may find that they can influence only state-chartered banks and credit unions, leaving a patchwork regime with limited practical effect.
The federal stance also raises questions about how merchants can realistically challenge interchange levels. With state tools constrained, disputes over card fees will increasingly play out in federal forums: through congressional oversight, antitrust litigation, or regulatory petitions directed at agencies like the OCC and NCUA. Merchants and trade groups may turn to existing federal complaint channels, such as the OCC’s Customer Assistance system, to press concerns about fee practices and their impact on small businesses.
For now, the combined actions of the OCC and NCUA mark a clear boundary: when it comes to interchange fees charged by federally chartered institutions, federal regulators intend to keep states on the sidelines. Illinois’ experiment in targeted swipe-fee relief may continue in narrowed form for state-chartered issuers, but its broader ambitions have run headlong into the limits of state power in a federally dominated payments system.
David M. Keller is a finance writer based in Columbus, Ohio, covering personal finance and consumer-focused economic topics. He earned his degree in journalism from Ohio University and began his career reporting on local business and economic trends for a regional media outlet. Since then, he has contributed to a variety of online publications, focusing on clear, practical coverage of topics such as cost of living, debt, and everyday financial decision-making.
