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Illinois banks are “freaking out,” their attorney told the chief judge of Chicago’s federal courts Wednesday.
Lawyer Charlotte Taylor used the colloquial phrase several times during a more than two-hour court hearing that was otherwise so focused on complex intricacies of banking case law that U.S. District Court Chief Judge Virigina Kendall joked she’ll have to return to law school to make a decision.
The Illinois Bankers Association, American Bankers Association, America’s Credit Unions and the Illinois Credit Union League are asking Kendall to put a preemptive temporary hold (known as a preliminary injunction) on Illinois’ first-in-the-nation law that starting in July will limit institutions in the lucrative practice of charging a fee when consumers use a credit or debit card.
The law doesn’t outlaw so-called interchange fees completely, but it does preclude credit card processors from applying the fee on the portion of a card swipe that pays for state and local taxes and tips.
An attorney defending the law on the state’s behalf pressed back that states are laboratories of democracy and Illinois is within its legal rights to pursue this experiment.
When customers swipe a credit or debit card for a purchase, they likely don’t realize the behind-the-scenes labyrinth that transpires between the bank that issued the card, the merchant’s bank and the merchant.
The financial institution that issues the credit card — be it a local credit union or a massive institution like Visa or Mastercard — is “liable” for the cost, Taylor said, and in return charges retailers what’s known as an “interchange fee” that’s a percentage of the purchase.
Experts believe Illinois would be the first jurisdiction worldwide to preclude banks from applying the fee to the entire transaction.
Credit card processors that defy the law by charging retailers a fee on taxes and tips could face a financial penalty.
Taylor said there’s “no way at the point of sale to break up the transaction into those pieces,” as the financial path kickstarted by a card swipe involves a “complex set of codes” and programming “established through years of trial and error.”
“It’s not a matter of just saying ‘voila’ we’ve got three amounts: base, tax and tip,” Taylor said, particularly given the wide range of local sales taxes that programmers would need to account for in adjusting codes.
Retailers also have the option to manually submit receipts, adding to the complexity.
Taylor said it could take Visa and Mastercard many months or even years to implement such a change, let alone smaller financial institutions.
Hence what she characterized as the “freaking out,” as banks eye the law’s mandate to “flip the switch” by July 1. Taylor cited a bank in the Champaign-Urbana area with 3,800 debit card holders that last year had 900,000 debit card transactions.
She said the bank is worried that if it’s not full compliance, it risks $900 million in annual civil penalties.
“People are freaking out because it’s very, very hard to know how you even go about setting up a system” like this, particularly when getting it wrong could mean the bank is “subject to these massive civil penalties,” Taylor said.
But Assistant Illinois Attorney General Darren Kinkead, defending the law, said Illinois Attorney General Kwame Raoul’s office does not intend to enforce those steep penalties.
“We disavow any intention to,” Kinkead told Kendall, and questioned whether Raoul even has enforcement authority, though Kinkead said local state’s attorneys representing Illinois’ 102 counties do have that power, even though the bankers didn’t include them in the lawsuit.
“(There’s) nothing in IFPA (the Interchange Fee Prohibition Act) that says we can go after civil penalties,” Kinkead said.
Still, Kinkead said, if banks are truly so worried about facing those fines and the process for making the change is so complicated and lengthy, then putting the law on temporary hold won’t give them the remedy they’re seeking.
If granted, a preliminary injunction could be appealed or vacated at any point, in which case the July 1 deadline would return.
As a matter of common sense, Kinkead asked, are banks worried about incurring fines “really going to stop preparing” because a preliminary junction is in place?
“Common sense says no, that’s not going to remedy the injury that they have brought to you,” Kinkead said.
Kinkead also pointed out that the bank associations’ attorneys did not tell Kendall it would be “impossible” to comply with Illinois’ law, just that it would be “difficult” to implement.
Illinois legislators passed the law with little debate in the final days of their May session. It was viewed as a way to pacify retailers, upset about the state buttressing its own budget by capping the cut retailers get to keep for collecting and processing the sales tax on the state’s behalf.
By limiting the interchange fee, retailers stand to benefit by either keeping costs level and pocketing the money that would otherwise go to banks, or by reducing prices some and therefore theoretically becoming more competitive.
Retailers requested that Kendall allow them to become an official party to the suit, so they can help to defend it.
The banks’ legal team pushed back on that request and said like other interested parties, retailers can have their say through friend-of-the-court amicus briefs. Plaintiffs’ lawyer Boris Bershteyn compared the retailer associations’ attempt to someone invited to brunch overstaying their welcome with a sleepover.
Other legal arguments at play during Wednesday’s hearing centered on federal banking law, and on the ramifications of another aspect of the law that restricts how banks use data collected when processing transactions.
Earlier this month, the federal Office of the Comptroller of Currency filed a friend-of-the-court brief that said Illinois’ interchange fee law “prevents or significantly interferes with federally-authorized banking powers that are fundamental to safe and sound banking” and called the statute “ill-conceived, highly unusual, and largely unworkable.”
Democratic Gov. J.B. Pritzker has defended the law, and in an interview with WTTW News just after the bankers’ lawsuit was filed in August, said “we’re trying to be creative, and you know, getting things done, lowering costs for consumers.”
Pritzker said that when he signed the law, he hadn’t anticipated it would spur legal action, but that “I think it’ll be successful ultimately in the courts.”
Aside from the legal arguments at play, bankers and retailers dispute the practical ramifications of the law.
Financial institutions warn that it would wreak havoc on regular, quick transactions.
“We’re going to have … chaos at the point of sale,” said Illinois Bankers Association Vice President Ben Jackson. “Consumers love transactions that work today. I was at the United Center last night. It’s totally cashless, right? So not only do consumers like the credit card processing experience, but so do businesses.”
Ashley Sharp, with the Illinois Credit Union League, said that already some institutions are holding off on community investments “because they know that this is out there pending, and the costs associated will be significant.”
Jackson and Sharp said some institutions are considering getting out of the credit and debit card business completely due to the law.
But retailers said banks — in Illinois and nationally — are fighting so hard because they fear that if Illinois succeeds, other states will follow, amputating a revenue stream.
And the Illinois Retail Merchants Association released a survey last month showing public support for the change.
The association’s president and CEO, Rob Karr, has said limiting the swipe fees will “provide tangible relief to Illinois workers, families and retailers of all size and types.”
“The idea that banning swipe fees would harm consumers is completely false,” Karr said in a September news release, arguing it will instead “keep costs low.”
Kendall on Wendesday did not give any indication as to when she will issue a ruling on the matter.
Contact Amanda Vinicky: @AmandaVinicky | [email protected]
