Our Take
The OCC's preemption move gives banks stronger legal ground, but state momentum suggests a messy patchwork until federal rules clarify in 2026.
Why it matters
Payment processors face conflicting state and federal rules starting July 1, while Colorado's passage signals more states will follow despite federal pushback.
Do this week
Payment teams: audit transaction segmentation capabilities before July 1 so you can comply with Illinois requirements while federal preemption plays out.
7th Circuit sends Illinois case back to lower court
A federal appeals judge ruled Friday to remand the banking industry's lawsuit challenging Illinois' interchange fee ban back to district court for further proceedings. The Illinois Interchange Fee Prohibition Act remains scheduled to take effect July 1, barring banks from charging interchange fees on state sales tax and gratuity portions of transactions.
The same week, Colorado's House passed similar legislation banning interchange fees on sales tax components, sending the "Swipe Fee Fairness and Consumer Safeguards Act" to Governor Jared Polis. If enacted, Colorado would become the second state with such restrictions.
Banking groups including the Illinois Bankers Association, American Bankers Association, and America's Credit Unions celebrated the remand decision. They argue the Illinois law conflicts with federal banking powers under the National Bank Act and creates technical implementation problems for card networks.
Federal preemption creates competing timelines
The Office of the Comptroller of the Currency moved to preempt Illinois' ban last month, issuing interim rules that explicitly override the state law as of June 30, 2026. This creates a two-year window where state and federal authorities will have competing claims over interchange regulation.
Colorado's approach targets card networks directly rather than banks, potentially sidestepping OCC jurisdiction. The legislation establishes network regulations outside federal banking oversight, suggesting states are adapting their legal strategies based on the Illinois challenge.
Banking plaintiffs filed a supplementary brief arguing the OCC's preemption determination strengthens their position that state interchange bans "significantly interfere" with federal banking powers.
Implementation remains uncertain through 2026
Payment processors must prepare for Illinois compliance by July 1 despite ongoing litigation and federal preemption claims. The law requires segmenting transactions to exclude tax and tip portions from interchange calculations, which card networks say creates operational complexity.
Colorado's pending legislation adds regulatory uncertainty, as it focuses on network-level restrictions rather than bank-level prohibitions. Payment companies operating across multiple states face a patchwork of requirements until federal preemption takes full effect in 2026.
The district court proceedings in Illinois will likely accelerate given the July implementation deadline, while Colorado's approach may face similar legal challenges if enacted.