Banks file lawsuit challenging Illinois credit card fee law

A coalition of banking groups on Thursday filed a federal lawsuit challenging a new Illinois law they say would create costly chaos in their industry and headaches for consumers.

The law blocks banks and credit card companies from charging retailers a small fee on taxes and tips. Illinois earlier this year became the first state in the nation to enact such a law, prompting outrage and an oppositional ad campaign backed by some of the largest financial institutions in the country.

“While we continue to encourage state lawmakers to reconsider the (law), we cannot take the chance that this misguided gift to corporate megastores takes effect and damages our state’s economy,” said Randy Hultgren, president and CEO of the Illinois Bankers Association, one of the plaintiffs in the lawsuit.

The lawsuit, filed in U.S. District Court in Chicago and naming Illinois Attorney General Kwame Raoul as defendant, specifically argues that the Illinois law should not be enacted in part because it is preempted by federal law for national banks. Other existing laws say it shouldn’t be applied to Illinois or out-of-state banks, the complaint argues.

The plaintiffs — the IBA, American Bankers Association, America’s Credit Unions and the Illinois Credit Union League — are seeking to stop the law from being implemented while the the suit makes its way through the courts.

Lobbyists are expected to continue pressing lawmakers to repeal the law as the state legislature’s November veto session approaches.

Opponents of the law argue it could eventually force some consumers to pay for parts of their purchase in cash, if credit card companies can’t or won’t process taxes or tips. Proponents of the law, including Illinois’ largest retail association and many Democrats, say those claims overstate the consequences.

Illinois Retail Merchants Association President and CEO Rob Karr on Thursday said in a statement that the lawsuit was expected.

It’s “no surprise credit card companies would do all they can to undermine this law and maintain their ability to unilaterally impose exorbitant processing fees on workers’ tips and taxes on consumer purchases,” Karr said.

Karr has previously said the deal will result in a fairer system, though both banks and retailers will have to make some changes. Many of the retail association’s members are small businesses that support the change because it would lower fees, he said.

The law is set to take effect July 1. Unless a court stops its implementation, the law threatens to not only create costs to financial institutions but also “chaos throughout the state’s economy,” the complaint said.

Credit card companies and financial institutions currently charge retailers and restaurants a fee when consumers use cards based on the total transaction amount of the goods, tax and any tip. The law that the Democratic-majority Illinois General Assembly passed in spring would bar the financial institutions from charging the so-called interchange fees on the tax or gratuity portions of customers’ bills.

The goal was to lower the amount that credit card companies can charge retailers. Retailers suggested the provision because of a separate tax hike on retail that was part of the state’s revenue package, Rep. Kelly Burke of Evergreen Park, who sponsored the bill, said earlier this year.

The new Illinois law is separate from federal legislation on interchange fees pushed by U.S. Sen. Dick Durbin, but it similarly affects Visa, Mastercard and other large financial services companies.

When he signed Illinois’ revenue package earlier this year, Gov. JB Pritzker said he didn’t foresee any changes, but that the credit card issue is “certainly something I think we’re always willing to discuss, revisit, have a conversation about.

“There’s time to do that through the rest of the year,” he said.