OCC preempts Illinois swipe fee ban on taxes, tips

• Key insight: The Office of the Comptroller of the Currency issued interim final rule Friday preempting an Illinois law that bans banks from charging interchange fees on taxes and tips.
• Supporting data: The rule targets the Illinois Interchange Fee Prohibition Act, which is set to take effect July 1, 2026.
• Forward look: Legal challenges to the rule are likely, and the outcome of that litigation could have broader implications for state-level swipe fee laws and regulation.

The Office of the Comptroller of the Currency Friday issued an interim final rule and accompanying order that would preempt an Illinois state law banning the collection of interchange fees on taxes and tips.
The move is aimed at blocking the Illinois Interchange Fee Prohibition Act, a state law that bars credit card operators from charging interchange fees on taxes and tips, which is set to take effect July 1, 2026 and is being challenged in court.

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The OCC issued two interim final rules Friday: one affirming banks’ authority to charge fees set by third parties and another explicitly preempting Illinois’s law restricting interchange fees on taxes and tips, with the preemption effective on June 30, 2026. The OCC argues the state law would create a “complex, potentially unworkable, and destabilizing” set of rules on banks and payment card systems, especially if other states follow with similar measures.

“These fees, which include interchange fees, compensate these institutions for the costs of their participation, incentivize their provision of services and continued participation in the network, and enable enhancements, such as fraud detection and prevention, rewards programs, and technology upgrades,” the interim final order states. “Federal savings associations are neither subject to nor required to comply with these provisions of State law.”

Banks charge interchange fees — also known as swipe fees — every time a credit card is used, and those fees are justified as necessary to pay for fraud prevention, the cost of processing the transaction and offsetting the costs of credit card rewards. The fees are set by the card networks like Visa or Mastercard and often are around 2% to 3% of a transaction. Merchants paid nearly $200 billion in such fees last year.

Critics of interchange fees say payment systems are opaque, making it impossible to know what interchange fees are charged on any given transaction.

The Illinois Interchange Fee Prohibition Act, signed into law by Governor J.B. Pritzker in 2024, would bar banks and their affiliated card networks from levying such fees on the state sales tax and gratuity portions of transactions, with state officials saying merchants should not be charged for processing non-revenue. 

Shortly after the law’s passage in 2024, the American Bankers Association, America’s Credit Unions, Illinois Bankers Association and Illinois Credit Union League sued Illinois Attorney General Kwame Raoul to block the measure, saying the rule is technically unworkable, acts as a price control and could cost issuers millions. The state has subsequently moved to delay the law’s implementation for a year. A federal judge ruled in February to uphold the law; plaintiffs have appealed the district court’s ruling, and a ruling on that appeal is expected by mid-June. 

The OCC has also filed amicus briefs backing the plaintiffs’ case, arguing the law should be blocked because it conflicts with federal banking law and would significantly interfere with national banks’ ability to earn money from card transactions. Ten former OCC officials also filed a brief supporting the plaintiffs.

The Illinois Retail Merchants Association responded to the OCC’s notice of the draft interim final rule with concern, saying the move prioritizes “the bottom line of banks and credit card companies over meaningful relief for businesses and consumers.”

Jaret Seiberg, an analyst at TD Cowen, said the OCC’s move wades into an ongoing consequential legal fight for banks. If a federal judge upholds the law, other states will likely follow suit with their own interchange fee prohibitions. While banks will not have to follow the law at this point, legal challenges to the OCC’s order are likely. 

“It will then be up to Illinois to challenge the preemption order in court [and] we believe the state is unlikely to obtain a court order to block the interim final rule,” Seiberg wrote in a note. “Litigation over the interim final rules would be distinct from the banking industry challenge to the Illinois law.”

The Merchants Payments Coalition said the rule appears at odds with President Donald Trump’s campaign call for lowering costs for Americans. 

“This rogue move by the OCC flies in the face of President Trump saying we need to stop the swipe fee ripoff,” MPC Executive Committee member and National Association of Convenience Stores General Counsel Doug Kantor wrote in a press release. “The President himself has recognized the harm these fees do to affordability, and an agency working under his control should not be taking the opposite position. Worse yet, the OCC rules endorse price fixing of fees banks charge, including not just swipe fees but a wide range of consumer fees. That’s outrageous and would only make matters worse. Illinois has taken an important step toward bringing swipe fees under control while waiting for Congress to take broader action.”

Seiberg says the ultimate outcome hinges on how secure banks feel about their legal cover to continue charging interchange fees on transactions in jurisdictions where that’s up for debate. 

“The goal for the merchants is to create enough legal uncertainty that banks must seek congressional intervention,” Seiberg wrote in a research note. “That could open the door for Congress to enact legislation requiring the Federal Reserve to regulate credit interchange similar to debit interchange.”

Credit Union advocacy groups have already been urging their regulators to provide additional clarity surrounding the law. The Defense Credit Union Council wrote to the National Credit Union Administration asking the agency for clarity on whether federal law protects credit unions from the Illinois law. They say the uncertainty alone could cause higher costs and service disruptions.

“Credit unions need clear, timely guidance to avoid a patchwork of state mandates that could disrupt payments and increase costs for military families,” wrote Jason Stverak, DCUC Chief Advocacy Officer. “Even a clear statement of limits would help credit unions plan, while decisive action could preserve consistency, lower burden, and protect member services.”