Capping Credit Card Fees Threatens To Hurt Consumers and Small Businesses

Lawmakers can’t change the fact that expenses must be offset somewhere.

Two years ago, Illinois passed crowd-pleasing restrictions on credit card interchange fees, which are better known as "swipe fees." The ban on charging fees on processing payments for tips and taxes has now been delayed twice by skeptical federal judges and lawmakers worried that they've crafted a financial mess. These interventions may be saving the state from itself, as a new report points out that the law threatens to hurt consumers, small retailers, and local financial institutions.

Delayed Ban on Fees for Processing Taxes and Tips

Passed as part of a 2024 revenue bill, the Interchange Fee Prohibition Act (IFPA) defines "interchange fee" as "a fee established, charged, or received by a payment card network for the purpose of compensating the issuer for its involvement in an electronic payment transaction." It adds: "An issuer, a payment card network, an acquirer bank, or a processor may not receive or charge a merchant any interchange fee on the tax amount or gratuity of an electronic payment transaction if the merchant informs the acquirer bank or its designee of the tax or gratuity amount as part of the authorization or settlement process for the electronic payment transaction."

"Although merchants have long advocated for this change, banking and payment industry representatives argue that it imposes an undue hardship by forcing them to process certain components of transactions without compensation," attorneys Thomas V. Panoff and Maxwell Earp-Thomas noted for the National Law Review at the time. They also commented that the law could force Illinois payments to be processed differently than those originating in the rest of the country and the world beyond.

The situation is now being fought in court and in public between advocates who argue the fees are hidden costs and opponents who say they're an industry-standard means to cover the cost of business.

Arguments back and forth convinced a federal judge to bar enforcement of the law—which, after delays, was set to take effect in July. State legislators almost simultaneously put the law on hold until July 2027. That may be for the best, given the problems that state intervention in financial transactions could cause.

"While purported to be relief for merchants, the law is more likely to produce unintended consequences for consumers, financial institutions, and the majority of the merchants the law was meant to help," argues Steve Swedberg of the Competitive Enterprise Institute (CEI) in a report published last week. "More broadly, the IFPA raises fundamental questions about whether state-level payment regulation is compatible with the uniform standards required for a functioning national payments system."

Popular or Not, Fees Offset Expenses

Swedberg points out that payment networks are intermediaries in transactions between cardholders and merchants. It's a potentially lucrative business, but one that requires significant infrastructure behind the scenes: "In 2025, Visa reported operating expenses of more than $16 billion. These expenses include network and processing costs, personnel, and depreciation of technology and equipment." Mastercard reports similar expenses. Banks and credit unions that issue cards also must maintain infrastructure.

Fees are meant to offset expenses. Hand-waving them away as hidden costs doesn't erase the reason they exist, even if people don't want to pay them on charges for taxes and tips.

Swedberg emphasizes that this isn't the first attempt to limit swipe fees. He points to the Durbin Amendment, enacted as part of the 2010 Dodd–Frank Act, that capped debit card interchange fees charged by large financial institutions.

Caps on Swipe Fees Hurt Those They're Supposed To Help

According to a 2019 study by Vladimir Mukharlyamov of Georgetown University and Natasha Sarin of the University of Pennsylvania, the amendment decreased annual bank revenue by $6.5 billion. The researchers found that "covered banks responded to this 25 percent decline in interchange revenue by doubling monthly maintenance fees on checking accounts, decreasing the share of consumers with free checking accounts from 60 percent to 20 percent." The Durbin Amendment, they added, "may well have pushed consumers out of the traditional financial system and toward more costly alternatives," and they found "little evidence of across-the-board consumer savings."

Swedberg draws on a 2015 brief from the Federal Reserve Bank of Richmond, which found that capping fees didn't save consumers money overall. According to authors Renee Haltom and Zhu Wang, "the vast majority of merchants in the survey (77.2 percent) did not change prices post-regulation, very few merchants (1.2 percent) reduced prices, while a sizable fraction of merchants (21.6 percent) increased prices."

So, the last national attempt to cap interchange fees resulted in higher banking costs and some increased retail prices for consumers.

Swedberg also foresees higher costs for community banks and credit unions with fewer resources than national players. He observes that under the Illinois law, "the added friction of data submission, verification, and delayed reimbursement would introduce new operational costs and timing mismatches, particularly for smaller financial institutions with limited compliance infrastructure."

Smaller institutions are also more likely than larger ones to make mistakes that subject them to the IFPA's $1,000 penalty for each noncompliant transaction, which can quickly add up.

Swedberg emphasizes that smaller retailers may be dinged as the law forces changes to payment systems used by merchants, card issuers, and payment networks. "Large retailers with fully integrated payment ecosystems are positioned to implement these changes through existing infrastructure," he adds, "while smaller merchants face higher relative costs from upgrades, middleware, or operational workarounds."

Haltom and Wang noted that after the Durbin amendment, for transactions of $10 or less, "only 2.8 percent of merchants are estimated to have lower debit costs, 31.8 percent had increased costs, and 65.4 percent had costs that were unchanged." The fee flexibility that existed before Durbin was replaced by a more rigid system that increased costs for some retailers.

Avoid Fees the Old-Fashioned Way

Overall, Illinois lawmakers' attempt to please the crowd by mandating lower costs looks poised to create a mess that could leave the state's consumers, small banks, and retailers with higher costs and fewer choices if financial institutions leave to avoid headaches.

"To protect the integrity of the checkout experience and avoid driving financial providers from the Illinois market, the IFPA must be either repealed or overturned," concludes Swedberg.

Credit card fees are undoubtedly burdensome for consumers and retailers. Ultimately the best way to avoid them is the traditional way: Use cash.