Learn how Illinois' new Interchange Fees Act impacts merchants, what steps you need to take to comply, and how Swipesum can help you navigate this complex regulatory change. Stay competitive and prepared with our comprehensive guide.
On July 1, 2025, Illinois will become the first state in the nation to enforce the Interchange Fee Prohibition Act, a groundbreaking law that exempts merchants from paying interchange fees on the sales tax and tips included in credit and debit card transactions. While hailed as a win for retailers, this law presents a myriad of challenges that could reverberate across the entire payments industry.
For merchants operating in Illinois—or those watching closely from other states—the stakes couldn’t be higher. This new regulation could fundamentally change how businesses manage their credit card processing, and staying ahead of these changes is critical. In this deep dive, we’ll explore everything merchants need to know about the law, from understanding its provisions to preparing for compliance, with insights on how Swipesum can help you navigate this complex landscape.
If you're a merchant looking to be compliant and reduce most costs assiciated with accepting payments, talk to a payments consultant at no charge today.
The Interchange Fee Prohibition Act is a first-of-its-kind regulation that prohibits payment processors from charging merchant interchange fees on portions of transactions that account for sales taxes and tips.
Previously, merchants were required to pay these fees on the total transaction amount, including these non-revenue-generating components.
Illinois legislators crafted this law as a compromise. While the state will now cap the amount merchants can retain for collecting sales taxes at $1,000 per month—down from 1.75% of total sales tax collected—merchants will save on interchange fees, which can add up significantly over time. This law aims to alleviate the financial burden on retailers, who paid over $100 billion in interchange fees nationwide in 2023 alone.
For Illinois merchants, the financial benefits are clear: no more interchange fees on sales tax and tips. However, these savings come with a catch—substantial technical and operational changes will be required to comply with the new law.
While the financial relief is welcome, the Interchange Fee Prohibition Act introduces significant technical challenges that merchants and their payment processors must address.
Currently, transaction systems are designed to apply interchange fees to the total amount of a purchase, including taxes and tips. The new law requires that these elements be isolated, which is no small feat.
To comply with the new law, payment processors and software vendors must implement system-wide upgrades. These upgrades involve modifying the message formats used in transactions to ensure that sales taxes and tips are excluded from the amount on which interchange fees are calculated.
John Romer, Managing Director for Prescentus LLC, emphasizes the magnitude of this challenge: “The payments ecosystem is not set up to handle the flow of sales tax and gratuity data from end to end, which means the true cost of implementation is unknown”(Illinois processing Fees). For many merchants, this could mean investing in new point-of-sale (POS) systems or updating existing software—a process that could take anywhere from 12 to 36 months.
Implementing these changes will not only be time-consuming but also costly for both processors and merchants. The history of EMV chip reader rollouts, which dragged on for years with multiple deadline extensions, serves as a cautionary tale. For merchants, the cost of compliance could offset the savings from reduced interchange fees, making it crucial to partner with a knowledgeable payment consultant who can guide them through the process.
As with any major regulatory change, the Interchange Fee Prohibition Act has met with resistance. Banking associations and credit unions have filed lawsuits challenging the law, arguing that it infringes on federal authority and disrupts well-established payment systems. The Illinois Bankers Association, alongside other industry groups, contends that the law will create chaos in the payment card systems and undermine the safety and security that these systems provide.
The legal battle centers on whether Illinois has the right to impose such regulations, especially when they conflict with federal laws governing financial institutions. The outcome of this legal challenge could set a precedent for other states considering similar legislation, making it a critical case for the entire payments industry.
With the July 1, 2025, deadline looming, merchants must act quickly to ensure compliance with the new law. The first step is to conduct a thorough audit of your current payment processing arrangements. Identify the areas that will be impacted by the new law, such as how sales tax and tips are currently processed, and begin discussions with your payment processor about necessary system updates.
Michael Seaman, CEO of Swipesum, advises, “Compliance isn’t just about avoiding fines; it’s about staying competitive in a rapidly changing environment.” Merchants who proactively address these challenges will be better positioned to thrive under the new law.
Navigating the complexities of the Interchange Fee Prohibition Act requires more than just compliance; it requires strategic planning and expert guidance. This is where Swipesum comes in.
As a leading payments consultant, Swipesum offers comprehensive services to help Illinois merchants adapt to the new law. Our team can:
Consider the case of a mid-sized Illinois retailer who recently partnered with Swipesum to navigate the complexities of a similar regulatory change. Through our audit and consultation, the retailer was able to update their processing systems, avoid potential fines, and even reduce overall processing costs by 45%.
While the Interchange Fee Prohibition Act currently applies only to Illinois, its implications could be far-reaching. Other states are watching closely, and some have already attempted to pass similar legislation. Pennsylvania, Florida, and Texas have all considered bills that would exempt sales tax from interchange fees, though none have yet succeeded.
If Illinois’ law withstands legal challenges and proves successful, it could pave the way for similar regulations across the country. This would significantly widen the scope of merchants’ long-standing battle against interchange fees, potentially leading to a nationwide reevaluation of how credit card processing costs are managed.
The Interchange Fee Prohibition Act marks a significant shift in the landscape of credit card processing, with Illinois at the forefront of this change. For merchants, the law presents both opportunities and challenges. While the potential savings on interchange fees are substantial, the costs and complexities of compliance cannot be ignored.
By acting now—conducting audits, upgrading systems, and seeking expert guidance from consultants like Swipesum—merchants can not only comply with the new law but also position themselves for success in a rapidly evolving payments environment.
Call to Action: Don’t wait until the last minute to prepare for these changes. Contact Swipesum today for a consultation and ensure your business is ready to thrive under Illinois’ new Interchange Fee Prohibition Act.
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Michael Seaman
Michael Seaman is the co-founder and CEO of Swipesum. A veteran of the payments industry and former employee at one of the largest payments companies, Michael, along with his brother Stephen, has led Swipesum since its inception in 2016. Swipesum is committed to providing innovative payment solutions and exceptional service to its diverse clientele. In his free time, Michael enjoys traveling with his wife Kelsey and their three children, pole vaulting, and engaging in typical Midwestern dad activities.
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