Banking and credit groups opposed to a new Illinois law banning certain credit card fees argued before a federal judge on Wednesday that the regulation would be costly to financial institutions and is preempted by existing federal law for national, state and out-of-state banks.
The hearing on a request for a preliminary injunction followed months of complaints from the banking industry that Illinois’ first-in-the-nation law will hurt their business and cause headaches for consumers. The injunction request is part of a lawsuit filed in U.S. District Court in Chicago, which names Illinois Attorney General Kwame Raoul as defendant.
The complicated legal questions presented by the case prompted U.S. District Judge Virginia Kendall at one point to call out “law school geekiness” in the arguments from attorneys for the plaintiffs, which include the Illinois Bankers Association, the American Bankers Association, America’s Credit Unions and the Illinois Credit Union League.
The attorney general’s argument to dismiss the case is based largely on jurisdictional issues.
The credit card fee law was passed during this spring as part of the state budget package after it was pushed by retailers who sought it because of a separate tax hike on their businesses that was part of the state revenue proposal. Retailers say the law, which doesn’t take effect until July 1, would lower costs and that arguments about inconvenience to banks are overblown.
Credit card companies and financial institutions currently charge retailers a fee when consumers use cards, based on the total transaction including goods, tax and tip. The new law would bar fees on the tax or tip portions of customers’ bills, with a goal of lowering the amount that credit card companies can charge retailers.
Banks argue it would be burdensome and expensive to implement that change by July 1.
An attorney for the plaintiffs said Wednesday that while, in theory, a coding change could be enacted for point-of-sale software, companies would need to figure out a system that takes into account different tax jurisdictions, for example.
Those changes would cause a “waterfall effect” because multiple financial institutions may be involved in each transaction, attorney Charlotte Taylor said, and could take “years and hundreds of millions of dollars.”
And if those issues aren’t addressed, even smaller banks could face stiff penalties because the law would multiply penalties per transaction, Taylor said.
“Technical term: people are freaking out,” Taylor said of those banks.
Banks and credit card companies also say it could result in a system in which customers have to swipe more than once for some transactions, creating extra paperwork for small businesses.
The law’s opponents got a boost in recent weeks from the federal Office of the Comptroller of Currency, a bureau within the U.S. Department of the Treasury, which filed an amicus brief calling the Illinois law “ill-conceived, highly unusual, and largely unworkable.”
“In short, the (Illinois law) constitutes both bad policy and an unlawful interference with federally granted powers,” the brief said.
Darren Kinkead, arguing for the attorney general’s office, said the law should be allowed to play out.
“If it turns out that it’s really as bad as everyone is saying … that will work itself out through the democratic process,” he said.
State lawmakers are scheduled to return to Springfield after the election next month for a brief veto session. Ben Jackson of the Illinois Bankers Association said he thinks legislators are increasingly concerned about the law’s potential effects on constituents, but acknowledged that “there’s not a lot of time to do too much, generally” during the fall session.
Gov. JB Pritzker earlier this year said he didn’t foresee any changes to the law, but that the credit card issue is “certainly something I think we’re always willing to discuss, revisit, have a conversation about.”
The new Illinois law is separate from federal legislation on interchange fees pushed by U.S. Sen. Dick Durbin, but it similarly affects Visa, Mastercard and other large financial services companies.
Jackson said plaintiffs hope to get an answer on their injunction request within a few weeks, but Judge Kendall did not give an indication on when she might rule.
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