Hot Potato: The OCC and Courts Battle Out the Fate of the Illinois Interchange Fee Prohibition Act

Key Takeaways

• The Office of the Comptroller of the Currency (“OCC”) issued an interim final rule declaring that federal banking law preempts the Illinois Interchange Fee Prohibition Act (“IFPA”), creating significant uncertainty ahead of the law’s July 1, 2026, effective date.
• The IFPA litigation remains unsettled after the Seventh Circuit vacated the United States District Court for the Northern District of Illinois’ prior ruling and remanded the case for further proceedings following the OCC’s intervention.
• Banks, payment networks, merchants, and payment processors should closely monitor ongoing litigation and regulatory developments, particularly regarding compliance obligations for state-chartered institutions outside the OCC’s jurisdiction.

On April 29, 2026, the OCC, a division of the federal Department of the Treasury that regulates nationally chartered banks, issued an interim final rule and order declaring that federal law preempts Illinois’ hotly contested IFPA. The OCC’s order is set to take effect on June 30, 2026, one day before the IFPA’s delayed effective date of July 1, 2026.

What the Illinois IFPA Requires From Card Issuers and Payment Processors

The OCC’s order is the latest twist in a labyrinth of legal maneuvering that has plagued the IFPA since it was enacted in 2024, with an original effective date of July 1, 2025. The IFPA has two key provisions:

1. Interchange fees cannot be charged on taxes and tips; and
2. Payment card information cannot be used for any purpose other than the actual processing of the payment transaction.

Challenges in Federal Court

The IFPA caused a furor upon its enactment, with financial institutions and the payment card industry protesting on a variety of legal and practical grounds. Challengers argued that the IFPA was an unconstitutional attempt by a state to invade the province of federal banking regulation. The payments industry protested that the infrastructure necessary to implement the IFPA did not exist and could not be put in place on the required timeline. Further, the limitations on the use of data would forestall important fraud prevention measures.

The United States District Court for the Northern District of Illinois granted a temporary injunction against the IFPA, and its effective date was pushed back to July 1, 2026. However, after extensive further proceedings, the district court partially reversed its initial decision. On February 10, 2026, the district court ruled that the IFPA’s prohibition on charging interchange on taxes and tips was not preempted. While the court was sympathetic to the IFPA’s potential to disrupt the payments ecosystem, it found that the disruption was largely due to a private system of payment card network rules, and not to federal laws. However, the court found that the limitation of the use of payment card data was largely preempted and could not go forward. The decision was appealed to the United States Court of Appeals for the Seventh Circuit and was set for an expedited briefing schedule, with the hope that a final decision could be rendered prior to July 1, 2026.

OCC Declares Federal Preemption of the Illinois IFPA

With the fate of the IFPA hanging in the balance before the courts, the OCC took its own decisive stance. On April 29, 2026, the OCC issued an interim final rule and order declaring that federal law preempts the Illinois Interchange Fee Prohibition Act. The OCC explained:

“[T]he IFPA creates a complex and potentially unworkable standard, and it imposes significant potential liability for non-compliance. Therefore, national banks may take drastic actions to avoid these risks, up to and including declining payment card transactions subject to the IFPA. Given the complexity of the payment card systems and the modern economy, these effects may not be limited to Illinois.

. . .

[T]he OCC is issuing an interim final order concluding that Federal law preempts the Illinois Interchange Fee Prohibition Act, which purports to (1) prohibit national banks and Federal savings associations from charging or receiving interchange fees on the tax and gratuity portions of payment card transactions; and (2) restrict the use of payment card transaction data. The OCC invites public comments on this interim final order.”

The public comment period will remain open until May 29, 2026, but the rule will take effect on June 30, 2026.

How the Seventh Circuit Responded to the OCC’s IFPA Preemption Order

Meanwhile, the Seventh Circuit had been set to hear arguments in the pending IFPA appeal on May 13, 2026. When the OCC announced its interim order, the parties to the litigation filed supplemental briefs. The attorney general of Illinois, who is defending the IFPA’s validity, argued that the OCC’s action was substantially and procedurally invalid, while the IFPA’s challengers urged that the OCC’s action meant that the court should invalidate the IFPA. As an appellate court, the Seventh Circuit refused to be the first to consider the issue. Instead, it vacated the district court’s ruling, remanded the case for further proceedings, and canceled the oral argument that had been set for May 13, 2026. The parties to the IFPA case in Illinois are going back to the drawing board before the district court.

What Banks, Payment Networks, and Merchants Should Expect Next

The IFPA’s status is conflicted, to say the least. As of now, the district court’s long and careful analysis reaching various conclusions as to the validity of the two prongs of the IFPA is vacated. The OCC’s rule — which would nullify the IFPA as to nationally chartered banks and federal savings associations within the OCC’s jurisdiction — will take effect on June 30, 2026, if the order survives. However, even if the order does survive, the order does not reach state-chartered banks outside the OCC’s purview.

For now, the matter is back in the district court, with the prior judgment wiped away, and only about seven weeks remaining before the presumptive go-live date for the IFPA. Any ruling by the district court will almost certainly be appealed by the unsuccessful party. Given the novel questions of law presented by the OCC’s involvement in this matter and the patchwork of state and federal banking compliance, it may be that regulators and/or the district court opt to further postpone the effective date of the IFPA until a decision can be made on its legality.

For guidance on these issues, please contact a member of AGG’s Payment Systems & Fintech industry team.