A last-minute legislative maneuver in Illinois has set the stage for a major disruption to the way small businesses process credit and debit card transactions. The Interchange Fee Prohibition Act, passed in May, may appear to be a simple policy change, but in reality, it creates a logistical and financial nightmare for small businesses, tipped workers, and everyday consumers.
At its core, the new law prohibits interchange service costs—typically around 2% of a transaction—from being applied to sales tax and tips. While this may seem like a way to reduce fees, the consequences will be far-reaching and overwhelmingly negative.
The Hidden Costs of the Interchange Fee Prohibition Act
If this law takes effect in July 2025, small businesses will be forced to process two separate transactions for every purchase:
1. One for the cost of goods or services
2. Another for sales tax and tips (which may need to be paid separately, potentially in cash)
This added complexity means businesses will need new software and equipment upgrades, devote more time to accounting, and navigate frustrated customers unaccustomed to a two-step payment process.
Who Really Wins?
A recent cost study confirms that only corporate giants like Walmart and Home Depot stand to gain from this misguided policy. The top 10 retailers in Illinois are set to pocket over $25 million annually, while the average small business will see less than $60 in annual savings—barely enough to justify the expensive changes required to comply with the law.
What This Means for You
For Small Businesses: Expect higher costs, administrative headaches, and longer checkout times—all of which could drive customers away.
For Consumers: The law could lead to increased fraud risks, privacy concerns, and a decline in credit card rewards programs, which often rely on interchange fees.
For Tipped and Gig Workers: With a likely shift back to cash payments, workers could see fewer tips and potential reductions in wages as digital tipping becomes more complicated.
For the State of Illinois: The law will not generate additional revenue but could create legal challenges that cost taxpayers millions to defend its constitutionality.
Take Action Now
With the law set to take effect in July 2025, businesses and consumers must speak out against the Interchange Fee Prohibition Act. Illinois cannot afford a policy that benefits a handful of corporate megastores while hurting small businesses, workers, and consumers.
If you care about preserving seamless transactions, protecting local businesses, and ensuring fair wages for tipped workers, now is the time to contact your representatives and urge them to reconsider this harmful legislation. You can also join ILBCC on Lobby Day April 9, 2025 so that we can let legislation know that business owners are against this act.
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