The States’ Battle to Regulate Interchange

Bills are popping up in statehouses all over the country. So far, the payments industry has kept all but one from passing. Can it keep the winning streak going?

Legislation to regulate card interchange has been bouncing around statehouses for nearly two decades. Until recently, those efforts have been unsuccessful and sporadic, with only a few bills emerging annually.

No longer. Since Illinois in 2024 became the first state to pass an interchange law, a trend among other states to regulate interchange has shifted into overdrive. In the past year, such bills have been introduced or previewed before lawmakers in 22 states, according to the Electronic Transactions Association.

Of those state legislatures, 13 remain in session. Illinois voted to delay implementation of its Interchange Fee Prohibition Act for a year, to July 1, 2026.

While the bills in other states are modeled after the Illinois act— which exempts sales tax and tips from interchange—some go further. Colorado, for example, introduced a bill that not only exempts merchants from paying interchange on sales tax and tips, but also prevents the card networks from fixing interchange fees. It would also cap interchange on charitable contributions and allow legal action if the card networks commit a violation. The bill passed in Colorado’s house of representatives, but has stalled in the senate.

Among states introducing interchange regulation in the past year, Alaska has gone farthest. Its bill, attached at the 11th hour to a bill authorizing businesses to pay employees using reloadable cards, is in committee before Alaska’s house.

If the bill makes it to a vote on the house floor, it would require only a simple majority to approve and send it to the governor’s desk to be signed or vetoed. The Alaskan legislature will take up the bill when it reconvenes in January.

Not surprisingly, the payments industry is keeping close tabs on the events in Alaska. A “lot of procedural boxes have been checked” that place the bill on the “precipice” of going to the governor’s desk, says Scott Talbott, executive vice president of the Electronic Transactions Association.

Similar bills have been introduced in Massachusetts and New York. The Massachusetts legislature is scheduled to adjourn Nov. 19, while New York’s lawmakers were scheduled to adjourn in mid-June.

‘Playing the Violin’

The trend to regulate interchange at the state level is being driven by myriad factors. Merchant groups feel emboldened by the success in Illinois. Also, merchants argue sales tax and tips should be exempt from interchange because it is money they do not keep. And, in the face of inflationary pressures, state lawmakers generally desire to help merchants, especially small businesses such as restaurants, increase their margins.

Also, the issue of state caps on interchange has become highly politicized. “Interchange regulation has become an avenue for state legislators to say they have the little guy’s back,” says Brandi Gregory, managing director, payments practice for Cornerstone Advisors. “In some ways, the legislation is an opportunity for state legislators to play the hero for their small-business constituents.”

Merchants’ efforts at the state level often hold up small businesses, typically restaurants, as the main beneficiaries of interchange relief. The reason, payments experts say, is that restaurants and small merchants tend to be viewed by the public in a more sympathetic light than so-called mega-merchants like -Walmart Inc. and Amazon.com.

“Architects of these bills are putting small businesses out there and playing the violin, because the public tends to love the underdog, which in this case is the small merchant,” says Eric Grover, principal at the consultancy Intrepid Ventures. “The reality is that small merchants will have a tougher time complying with these proposed laws because they lack the resources for implementation, while the big merchants don’t.”

The battle between merchants and banks at the state level is a natural evolution of a long-running fight between merchants and the payments industry over the cost of card acceptance. It’s a battle that’s been fought in the courts, including antitrust courts, and has filtered down to state lawmakers as efforts to regulate interchange at the federal level have foundered.

“For state lawmakers, the narrative is that these bills provide small businesses [interchange] relief and are seen as a way to plug a fairness gap that has not been addressed at the federal level,” says Matt Marino, president of Wink Pay, an open-payments platform that uses biometric authentication. “It’s a strong narrative for state politicians.”

‘A Measure of Desperation’

Despite efforts to make small merchants the face of interchange regulation, large merchants tend to be the ones lobbying state lawmakers the hardest.

The Electronic Payments Coalition released an infographic that says lobbying disclosures from Colorado, Connecticut, Rhode Island, Texas, and the District of Columbia reveal Walmart, Target Corp., and The Home Depot Inc. “simultaneously deployed lobbyists to advocate for nearly identical versions” of interchange legislation.

The disclosures “make it clear the nation’s largest corporate mega-stores are really the ones behind this coordinated legislative effort” to regulate interchange at the state level, the infographic says.

“Efforts at the state level to regulate interchange are clearly being driven by the largest merchants, as they are the ones meeting with state lawmakers,” an EPC spokesperson says. The spokesperson adds that working the states is helpful to merchant interests “because momentum for this can’t be built at the federal level.”

The merchant community counters that state lawmakers are motivated to help businesses. “The rise in swipe fees since 2020 has been astronomical, and those are out-the-door dollars for merchants,” says Doug Kantor, a Merchants Payment Coalition executive committee member and general counsel for the National Association of Convenience Stores.

“There is a measure of desperation among merchants over how high and fast fees are rising,” Kantor says.

The average card swipe fee is 2.35% for Mastercard and Visa-branded credit cards, according to the Merchants Payments Coalition. Credit card processing fees for merchants equal 1.10% to 3.15% of each credit card transaction, according to The Motley Fool Money, a daily business and investment podcast.

Swipe fees include interchange, which the EPC argues has remained stable in recent years and in the range cited by the MPC. In addition, interchange itself has remained flat at 1.8%, on average, for about seven years, the EPC says.

“Processing fees aren’t the only cost merchants face. There are a lot of other fees associated with doing business, including Internet and electricity-delivery fees,” says the EPC spokesperson. “If a merchant’s card-acceptance costs are going up, it is because they are generating more card transactions.”

Interchange fees, however, vary by card and transaction type, as well as such factors as transaction risk and whether the transaction is made in-person or online.

‘Snap Your Fingers’

Given the complexities of card pricing and of the payments ecosystem in general, educating lawmakers about these nuances is a key weapon in merchants’ and banks’ arsenal in lobbying state lawmakers, payments experts say.

“State lawmakers lack an understanding of the complexity of the payments ecosystem, which is that interchange settlement does not take place at the state or local level, it is done nationally,” says Cornerstone’s Gregory.

As a result, interchange regulation is an issue that can’t be addressed in a simplistic manner, as some state lawmakers are attempting to do, because it gives them an opening to support the legislation without “knowing the ins and outs” of the card system and interchange, says Zach Milne, a senior economist and research analyst for the Common Sense Institute.

Educating state lawmakers about the complexities of the card payment ecosystem is a way to keep such bills from advancing. “There are a lot of data around card transactions, and to exclude sales tax and tips requires significant modification to separate out that data from the transaction, which would be a heavy lift,” Milne says. “You can’t just pass a law, snap your fingers, and say merchants don’t pay interchange on sales tax and tips.”

The Common Sense Institute has published a report on the economic impact of interchange regulation at the state level.

The merchant community also sees a case for educating lawmakers about interchange and card acceptance, in their instance as a way to garner support for interchange regulation.

“The more legislators understand the impact of acceptance fees on merchants, the more likely they are to support changing the system,” adds Kantor, who has addressed several state legislatures considering interchange regulation. “The card industry has tried just about everything to repeal the IFPA and has failed, that says something.”

With implementation of the IFPA delayed by a year, all eyes in the payments industry are on what will happen next in Illinois.

Legal challenges to the law remain. As of late June, plaintiffs in the legal battle were awaiting a ruling on a motion to exempt all parties within the payments ecosystem involved with a credit or debit card transaction from the IFPA. The exemption would include the card networks and processors. Plaintiffs argue all parties should be exempt from the law due to the “interconnectivity” of the electronic payments system.

The court had previously granted a preliminary injunction exempting financial institutions chartered outside Illinois but doing business in the state from complying with the law. Card issuers with Illinois state banking charters, the Visa and Mastercard networks, and other entities within the payments ecosystem were not included in the injunction.

Regardless of how the court ultimately rules, opponents of the IFPA say they expect the law to be repealed once the Illinois legislation reconvenes in the fall. Even if the courts don’t grant the injunction to exempt more players, the odds are favorable for repeal, says the ETA’s Talbott.

“In that situation, it’s difficult to see legislators allowing a law to stand that impacts a key portion of their local constituents, but exempts federally charted banks,” he says.

If nothing else, the Illinois legislature’s decision delaying implementation of the IFPA is likely to give other states pause until the uncertainty around the law’s future abates. Lawmakers tend to shy away from legislation that could be overturned in the courts or repealed, or that requires a substantial rewrite, payment experts say.