On September 22, Chief United States District Judge Virginia Kendall added federal credit unions to a permanent injunction blocking enforcement of the Illinois Interchange Fee Prohibition Act against them. The law bans charging or receiving interchange on the sales tax and gratuity portions of card transactions in Illinois, and it is scheduled to take effect on July 1, 2027 after two delays by the General Assembly. Whether a given card issuer has to comply when that date arrives now depends less on what the issuer does than on who charters it.

That is not how the law was drafted. It is how two years of preemption litigation and one procedural doctrine have left it.

The exemption map is drawn by charter, not conduct

Kendall's June order covered national banks, federal savings associations, out-of-state state-chartered banks shielded by federal law, and payment card networks. The September order extends the same relief to federal credit unions. What remains inside the law, according to the trade groups that have been litigating it, is a narrower set: certain state-chartered institutions, especially those chartered in Illinois. State-chartered credit unions are not covered by any of the injunctions, and neither are Illinois-chartered banks and savings associations.

Nothing about the underlying conduct distinguishes the two groups. Both issue cards, both would collect the same fee on the same tax line of the same restaurant bill, and both operate under the same state statute. The difference is the source of their charter and the federal law that attaches to it.

That distinction has a consequence the drafters probably did not intend. Two cards can be presented for the same transaction in the same restaurant, and the fee prohibition applies to one and not the other. Merchants, processors and networks have to build for that split, and the split is invisible to the customer who pays the tax.

Sovereign immunity is why the state-chartered ones are still in

The institutions still bound by the law did not lose an argument about preemption. They never got to make one. Illinois-chartered banks, savings associations and credit unions had their claims for injunctive relief dismissed in December 2024 after the Illinois attorney general invoked sovereign immunity, which blocks private parties from suing a state in federal court to stop enforcement of its own law. The federally chartered institutions could sue because their claims rest on federal law that preempts the state statute. The state-chartered ones are attempting to enjoin their own regulator's enforcement of their own chartering state's law, and that route is closed.

So the coverage map is not a ranking of institutions by size or risk. It is a map of who has standing to ask a federal court for relief. The practical effect is that the smallest institutions in the state, the ones least able to absorb a compliance build for a fee change that applies to a slice of every taxed transaction, are the ones who must attempt it.

The preemption theory, and the ground the newest part stands on

The preemption theory behind the injunctions did not work on its first attempt. When Kendall first considered the fee provision, she upheld it, for a narrow reason: payment card networks, not banks, set interchange fee schedules, so a federal grant of authority to a bank over its own fees did not reach a fee the bank collects under a schedule someone else publishes. The data-use restriction in the same statute fell the other way, because it regulated what an institution did with information in its own possession, which is squarely the kind of conduct federal banking law preempts. The court enjoined that restriction as applied to federally regulated institutions and left the fee ban standing.

That split is what the OCC and later the NCUA had to close. Their interim rules do not change who sets interchange. They declare that federal law gives a federally chartered institution authority to charge this kind of fee in the first place, whether or not a third party sets the amount, and that a state cannot forbid what the charter authorizes. The theory moved from the bank owning the fee to the charter authorizing it, and the injunctions followed the theory.

The credit union piece turned on the second of those actions rather than a court finding. In June 2026 the National Credit Union Administration issued an interim final rule asserting that the Federal Credit Union Act gives federal credit unions authority to charge non-interest fees, including interchange, even when a third party sets them, and that conflicting state laws are preempted. It took effect at the end of June with comments due in early July. The agency issued it without advance notice and comment, citing good cause tied to the district court's earlier decision and the statute's effective date.

That sequence repeated what had already happened on the bank side. The Office of the Comptroller of the Currency had issued its own interim measures asserting preemption, which prompted the Seventh Circuit to remand the case to Kendall and produced the June injunction. Each federal regulator's assertion of preemption widened the exempt set, which is a notable pattern in itself: a state consumer-protection statute is being narrowed not by Congress and not by a merits ruling, but by agency rulemakings written on shortened timelines.

Kendall's September opinion acknowledged the weakness in the newest link. She noted that the NCUA's preemption expansion, adopted after the earlier ruling, stands on shakier ground than the OCC measures that preceded it, then granted the relief on other grounds rather than resting the decision on the NCUA rule. That is a signal about what an appellate court may do with it.

What the deadline costs the institutions still inside

The sum at issue is not small on a per-transaction basis, which is why the fight has lasted this long. On a full-service restaurant bill with a 20 percent gratuity, the tax and tip portion runs close to a fifth of the total charged to the card, and interchange is assessed as a percentage of the amount processed. On a $100 meal that is roughly $20 of the transaction moved outside the fee base. Multiplied across every taxed card transaction in the state, it is the kind of number that funds a lobbying campaign on both sides.

The compliance problem for a state-chartered institution is not the fee itself. It is the plumbing. Interchange on the tax and gratuity portion of a transaction has to be identified, not charged, and reconciled against a fee schedule that networks set and processors apply. That means changes to authorization, clearing and settlement logic, plus the reporting to demonstrate that a fee on the sales tax line of a restaurant bill was excluded while the same fee on the food portion was not. Transaction data rules that the law also imposed are enjoined for the federally regulated institutions but apply, in principle, to those still inside it, subject to a February ruling that upheld the fee provision while striking the data-use restriction as applied to a broader group.

Illinois has already signaled that it understands the cost. The legislature delayed the effective date once, to July 1, 2026, and then again to July 1, 2027. Two delays in two years is an unusual amount of hesitation for a statute that its sponsors describe as a straightforward protection for merchants and consumers.

The merchant benefit shrinks as the exempt set grows

Interchange laws of this kind are sold on what merchants save. The Interchange Fee Prohibition Act would return to a merchant the fee assessed on the tax and tip portion of a bill, which for a full-service restaurant is a meaningful share of the total. The merchant groups that pushed for it have not withdrawn their support, and the trade groups litigating against the law continue to press for full repeal rather than for more exemptions.

But the arithmetic of the remedy has narrowed each time the exempt set expanded. Every institution moved out of the law's reach is volume that generates no savings for the merchant on the other side of the transaction. What is left is a statute that binds a shrinking share of the cards presented in Illinois while requiring the systems around those cards to distinguish between them. The compliance cost does not shrink with the covered population. It is largely fixed, and it is paid by the institutions least able to spread it.

The Seventh Circuit is the next stop

Both sides have somewhere to go. The banking and credit union trade groups have said they will keep pushing the General Assembly to repeal the law outright, and the state has a live statute with a deadline that its own legislature has twice pushed back. An appeal of the September order to the Seventh Circuit is the obvious next move, and it would put the NCUA's preemption theory in front of a panel a district judge has already described as weaker than the OCC's.

For an institution trying to plan a technology budget, the practical guidance is uncomfortable. The law takes effect on a date that has moved twice, its coverage depends on a rulemaking that may not survive appeal, and the institutions that cannot sue to challenge it are the ones with the least room to build for it. Whatever the Seventh Circuit decides, the more durable outcome may be legislative. A statute whose reach now depends on charter type and standing doctrine is an awkward instrument, and the parties who drafted it have the votes to rewrite it if they decide the current version is not worth defending.

Primary sources

  1. ABA Banking Journal, Court exempts federal credit unions from Illinois interchange law, and the earlier report on the June preemption ruling.
  2. Orrick InfoBytes, NCUA issues interim final rule on federal credit union authority to charge non-interest fees.
  3. Credit Union Times for the September 22 order, the institutions still subject to the law, and the deferred effective date.
  4. Payments Dive for the legislative delay of the Interchange Fee Prohibition Act to July 1, 2027.
  5. Sheppard Mullin for the June expansion of the injunction following the OCC action and the Seventh Circuit remand.