Retailers, restaurants and other merchants urged the National Credit Union Administration this week to withdraw its new rule preempting an Illinois law that curbs card interchange fees.
The NCUA’s “interim final rule” for credit unions took effect June 30 as the agency said it had “good cause” within its authority to skip a normal notice and comment period. Comments were due Thursday, which was 30 days after the agency issued the rule on June 9.
The NCUA preemption allows credit unions to skirt the Illinois law, called the Interchange Fee Prohibition Act. The law prohibits interchange fees on the tax and tip portion of customer bills. Illinois was the first state to enact a law aimed at curbing payment card interchange expense for retail businesses.
By allowing credit unions to collect interchange fees set by Visa and Mastercard, the rule “simply green-lights anticompetitive conduct, in which credit unions impose supracompetitive fees under the cover of the networks’ ‘default’ rates,” the Merchant Advisory Group, the National Restaurant Association and the Retail Industry Leaders Association wrote June 30 in a joint letter.
“The Interim Rule is not only bad policy, it is also unlawful both in substance and procedure,” the three groups added.
The NCUA rule raises “significant legal and policy concerns,” the Merchants Payments Coalition wrote Thursday in its comments to NCUA.
The preemption effort “appears to authorize conduct that is difficult to reconcile with established federal antitrust principles, departs from longstanding expectations regarding competitive markets, exceeds NCUA’s authority under the Federal Credit Union Act (FCUA), and adopts an overly broad interpretation of federal credit union preemption,” the coalition wrote.
The agency’s rule “also rests on an inaccurate understanding of the modern credit and debit card payments ecosystem,” the group added.
The new rule specifically lets credit unions assess and receive interchange fees from payments made with credit and debit cards. Credit unions – which joined banks in suing Illinois officials over the law – supported the new rule in their comments to the regulator.
Some credit unions cited onerous compliance costs in their support of the preemption rule.
Logix Federal Credit Union in Valencia, California, said it processes about 219,000 transactions in Illinois each year, and has a potential $219 million noncompliance exposure from the state if it did not properly separate interchange from taxes and tips.
“Faced with that kind of exposure, our credit union may have to take steps that hurt members, such as declining card transactions in Illinois or ending service to certain merchants,” Logix Chief Legal Officer Nick Mitchell wrote in a June 30 letter to NCUA.
Genisys Credit Union of Auburn Hills, Michigan, has “deep concerns about our ability to continue offering card products to our members if we are forced to comply with a growing patchwork of complex state-specific laws, like the IFPA, that are not consistent with safe, sound, and efficient banking practices,” Brian Dowgiallo, Genisys’ vice president of risk management, wrote in a Monday letter.
On June 1, U.S. District Judge Virginia Kendall issued a permanent injunction blocking the card-fee prohibition with respect to national banks, non-Illinois chartered banks and card networks. But the judge said her injunction doesn’t apply to credit unions, savings banks or banks chartered in Illinois.
The decision – a reversal of Kendall’s decision four months earlier to uphold the law’s central section – came after the Office of the Comptroller of the Currency issued an interim final rule to preempt the Illinois statute. A federal appeals court remanded the case in May for Kendall to consider the effect of the new OCC rule.
The plaintiffs filed a motion June 12 asking Kendall to reconsider her ruling with respect to whether the Illinois law applies to credit unions, given the rule change NCUA had published three days earlier. Kendall told the parties to file briefs on the motion by June 29; her ruling on the matter is pending.
Merchants’ arguments against the NCUA rule largely mirror those they made against the OCC’s April rule, which preempted the Illinois law for national banks. That’s because NCUA said it consulted with OCC staff in writing the preemption rule “and is adopting language that is substantially similar to the language adopted by the OCC.”
The law would save Illinois businesses and their customers about $500 billion annually, according to the MPC, a coalition of convenience stores, restaurants, supermarkets and online merchants.
Four trade associations – the Illinois Bankers Association, the American Bankers Association, America’s Credit Unions and Illinois Credit Union League – sued Illinois in August 2024 over the Interchange Fee Prohibition Act, two months after Gov. JB Pritzker signed it.
Illinois legislators have twice delayed the law’s effective date, which is now July 2027.
Facts Only
* Retailers, restaurants, and other merchants urged the NCUA to withdraw its new rule preempting Illinois law.
* The NCUA’s interim final rule for credit unions took effect June 30.
* The rule allows credit unions to bypass the Illinois Interchange Fee Prohibition Act.
* The Illinois law prohibits interchange fees on the tax and tip portion of customer bills.
* Allowing credit unions to collect interchange fees from Visa and Mastercard is central to the rule.
* Merchant Advisory Group, the National Restaurant Association, and the Retail Industry Leaders Association wrote a joint letter on June 30.
* These groups argued the rule "green-lights anticompetitive conduct" by imposing supracompetitive fees under network rates.
* The Merchants Payments Coalition contended the rule exceeds NCUA authority and departs from antitrust principles.
* Some credit unions supported the preemption, citing onerous compliance costs.
* Logix Federal Credit Union cited potential noncompliance exposure of $219 million in Illinois based on transactions in that state.
* Genisys Credit Union expressed concerns about offering card products due to compliance with state laws like the IFPA.
* A U.S. District Judge issued a permanent injunction blocking the fee prohibition for national banks, non-Illinois chartered banks, and card networks, but not credit unions or Illinois chartered entities.
Executive Summary
Retailers, restaurants, and other merchants urged the National Credit Union Administration (NCUA) to withdraw its interim final rule regarding credit union preemption of Illinois law concerning card interchange fees. The NCUA’s rule became effective June 30, allowing credit unions to bypass an Illinois law, the Interchange Fee Prohibition Act, which bans interchange fees on the tax and tip portion of customer bills. This preemption allows credit unions to collect interchange fees set by Visa and Mastercard. Merchant groups and associations argued this rule sanctions anticompetitive conduct by allowing credit unions to impose fees above network rates under the guise of default rates.
The Merchants Payments Coalition, the National Restaurant Association, and the Retail Industry Leaders Association contended that the interim rule raises legal and policy concerns, suggesting it departs from antitrust principles and exceeds the NCUA’s authority under the Federal Credit Union Act. While some credit unions supported the preemption rule, citing onerous compliance costs, others expressed deep concerns about their ability to offer card products if forced to comply with complex state laws. Legal action regarding the Illinois law is ongoing, with a federal judge issuing an injunction blocking the fee prohibition for national banks, non-Illinois chartered banks, and card networks, though the scope regarding credit unions remains pending review.
Full Take
The conflict centers on the tension between federal regulatory authority (NCUA/FCUA) and state economic policy concerning payment processing costs. The core pattern observed is a strategic deployment of regulatory delegation—the NCUA preempting a state law—to achieve an outcome favored by credit unions, which are actively invested in the change. This situation mirrors broader historical patterns where federal oversight is adapted to facilitate sector-specific financial arrangements that may conflict with broader antitrust or competitive market expectations.
The resistance from merchant and industry groups highlights a structural divergence between regulatory efficiency and perceived economic fairness. The argument suggests that if preemption is based on adherence to existing federal law rather than substantive antitrust principles, the outcome risks creating a fragmented, inequitable system where compliance burdens are pushed onto members (credit unions) while external economic benefits (saving state revenue) are diminished. The differing legal outcomes regarding credit unions versus national banks and network entities introduce significant ambiguity regarding the definition of "preemption" within the FCUA framework.
The implications suggest that regulatory carve-outs, when implemented based on convenience or compliance costs rather than clear federal mandate, can lead to externalities borne by the public interest. The fact that major industry coalitions are mobilized against a rule based on legal and policy substance, rather than just procedural error, signals an awareness of how institutional power structures are being redefined through rulemaking. This forces an inquiry into whether financial regulation adequately anticipates and safeguards competitive market dynamics in evolving payment ecosystems.
Bridge Questions: If the court's ruling regarding credit unions is delayed or reversed, how will the costs borne by individual members (like those cited by Logix and Genisys) be quantified and remedied? What precedent does this specific application of federal preemption set for future state-level economic regulation across other regulated industries? If regulatory bodies prioritize operational flexibility over adherence to established antitrust principles, what mechanisms should exist to ensure that resulting practices remain competitive rather than merely expedient?
Sentinel — Human
This analysis is a standard report detailing a specific regulatory dispute, characterized by factual citation and the presentation of competing stakeholder arguments surrounding an interim rule.