Over the last few years, the federal government has shown an increasing interest in credit cards and points and miles. Much of this originated with the proposed Credit Card Competition Act, but it has since expanded to major airlines and the loyalty programs they offer. Incidentally, the two original cosponsors of the CCCA were the first to call for an investigation into these frequent flyer programs — a call that ultimately led to the announcement of a formal probe by the U.S. Department of Transportation.
While these efforts at the federal level haven’t led to any concrete action (yet), state governments have recently opened a new front in the battle over the credit card transaction process.
Here’s what you need to know about current efforts underway across the U.S. to implement legislation that could upend the way you pay for goods and services.
Some background
First, a quick primer on the mechanics of a credit card transaction.
Every time you use a card to pay for something online or in a store, the merchant is charged a small percentage of the purchase amount — which averages out to roughly 2% — to process that transaction. This is typically referred to as the interchange fee, which is shared among the card’s issuing bank, the credit card payment network (most often Visa, Mastercard or American Express) and the merchant processing institution.
All parties use this interchange to safeguard the purchase, prevent fraud and fund rewards programs by issuing points, miles or cash back.
As a consumer, you’re protected from unauthorized charges, and you’re the one choosing the card (and network) for the purchase. Meanwhile, small businesses enjoy a near-frictionless transaction process, with minimal risk of loss or theft — a major concern when handling cash transactions.
Unfortunately, some states are considering new laws that would drastically change the experience for customers and businesses — and one has even become law.
New legislation in Illinois
Earlier this year, the Illinois state legislature passed a large budget bill, and it was signed into law by Democratic Gov. J. B. Pritzker on June 7. In it was a provision that would bar credit card companies from collecting interchange on taxes and tips (if a merchant opted to separate those items out).
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It may seem right to exempt these items from interchange. After all, a business is collecting them on behalf of others — whether it’s a taxing authority or a tip-eligible employee. Nevertheless, the swift passage of the measure with little discussion (it was introduced just days before the end of the legislature’s spring session) created more questions than answers.
Unfortunately, there were no additional details on how the new regulation would be implemented. That leaves it largely to the merchant, which could include costly upgrades to new processing hardware and software. Alternatively, they could simply collect interchange on the entire transaction (as they do today) and then request a refund for specific components. With varying tax rates across different items — many of which are sold at the same store — this would be a time-intensive process and likely not worth it for the state’s roughly 1.3 million small businesses.
In fact, a study (PDF link) conducted by the Electronic Payments Coalition found that the 40 largest retailers would take home nearly 40% of any interchange savings realized with the bill.
But the party feeling the brunt of the new law would likely be the average consumer.
Impact on the consumer
Under the provision, what was previously a simple swipe of a credit card could turn into a multistep process, as small businesses separate one transaction into two (or more) — one for the goods or services being purchased and the other(s) for taxes and gratuities, as applicable. They may even require two different payment methods for each.
For example, a restaurant owner can elect to separate out taxes and tips from the rest of the meal, which would require two card swipes. Or, you may be required to pay for your food and drinks with a card and fork over cash (or write a check) for the rest.
Every purchase you make also would be subject to additional scrutiny to ensure compliance with the new law. If a merchant decides to itemize transactions in their system for the purposes of avoiding interchange on taxes and tips, what was previously an entirely private transaction could suddenly be shared with other parties.
Although Illinois is the only state to have passed such a regulation so far, other states, including Georgia, Nevada, Tennessee and Texas, are considering similar measures.
Bottom line
While efforts continue at the federal level to regulate credit card processing, new initiatives are popping up within state governments as well. One that would exempt taxes and tips from interchange fees is set to take effect in Illinois on July 1, 2025. This would introduce confusion for consumers and additional burdens to small businesses.
While the mechanics of the measures vary, they all have some important similarities. The biggest beneficiaries are the largest retailers, and the implementation would add friction to a process that safeguards your data and allows you to earn rewards on every swipe of your credit card.
It remains to be seen whether other states (or the federal government) follow Illinois’ lead, but you can share your thoughts on these proposed bills with your elected representatives at the following links:
