Established over 150 years ago under President Abraham Lincoln, our national banking system’s uniform regulatory framework has facilitated smooth and efficient financial services nationwide. In a move that will wind back the clock to a pre-Civil War era — and harm Illinois businesses and their customers — Gov. JB Pritzker recently signed into law the Interchange Fee Prohibition Act.
Proponents of the law argue it will eliminate credit card transaction fees on sales taxes and tips, but the reality is much more complicated. The current payments system does not support separating tax and tip from the main transaction. Thus, businesses will be forced to stand up entirely new card-processing systems or adopt cumbersome accounting practices. Costs will almost certainly be passed on to consumers.
A big question remains on whether the payments industry could implement the law, in which case the quick and convenient experience consumers and businesses have today could be a thing of the past. The easy way to pay could be replaced by a clunky, two-or-more-step transaction or require cash. For example, when you swipe your credit card at the gas pump, you may need to swipe again to process the sales tax. For businesses that employ tip earners, such as restaurants, that tip would require a third, separate transaction or cash.
The irony that the Land of Lincoln is leading the charge to upend the very system our nation’s 16th president championed should not be lost on us, nor should the unintended consequences.
Unsurprisingly, small businesses are expected to bear the brunt of this misguided law, as necessary technology upgrades and operational challenges will lead to significantly increased costs. These small businesses would be forced to either take on the increased costs or — more likely — pass them on to consumers. Further, the law will raise prices on credit card fees while significantly undermining the benefits, safety and security that payment card systems provide for consumers, be it through convenience, reward programs, card disputes or fraud detection.
According to data from the National Federation of Independent Business, small-business owners consistently cite government regulations and taxes as top concerns. Illinois lawmakers have decided to double down, with one merchant payment expert affirming that "there is no way to implement what the law states easily or inexpensively. … Smaller issuers will cease servicing restaurants or allowing their cards to be used there solely to avoid the costs of compliance, reducing competition and ultimately resulting in higher costs for merchants and consumers."
The impacts of this law have national implications. If other states follow Illinois' lead in injecting state regulators into the business of national banks, we could soon face a patchwork of inconsistent and likely conflicting laws across the country, catching small businesses and consumers in the crossfire.
Just as we have blue states and red states, if these types of conflicting proposals continue, national banks are at risk of becoming either "blue banks" or "red banks" as they attempt to navigate these laws. Not only will this fragmentation undermine the services, benefits and customer protection standards that are the foundation of our national banking system, it will also discourage innovation and reduce access to critical products and services that could be outlawed in one state but mandated in another.
This is the exact scenario that the National Bank Act was designed to prevent. That’s why legal challenges to the IFPA began almost immediately after its passage. The American Bankers Association, along with other financial industry groups, filed a lawsuit challenging the law's validity, pointing out that the law violates multiple federal statutes and cannot be enforced against national banks, federal savings institutions or credit unions.
In a legal challenge to the law, Randy Hultgren, president and CEO of the Illinois Bankers Association, said, "Left unchecked, the IFPA will wreak havoc at the register every time people use their credit or debit card in Illinois, creating confusion for consumers and higher costs for small businesses and banks in our state."
By arbitrarily interfering with established free market systems that benefit both businesses and consumers, lawmakers risk increasing costs and reducing services for their constituents. This is, of course, occurring within the larger trend of Americans and their businesses fleeing high-cost, high-regulation states like Illinois for more business-friendly environments in Texas and Florida. This begs the question: What are residents getting in return for these burdensome regulations?
Policymakers at the state level in Illinois and across the country must remember that pro-free market policies, coupled with a consistent national regulatory framework for the financial sector, help support economic growth that benefits businesses and consumers.
The wide-ranging ramifications of these policies should serve as a wake-up call to state lawmakers across the political spectrum about the dangers of government overreach in the financial sector. Elected officials everywhere should stand firm against similar ill-conceived legislation and reaffirm their commitment to the consistent national banking system that has served our country, its businesses, and consumers well for over a century.
John Wittman is the executive director of Americans for Free Markets, a coalition of groups in support of free markets and economic growth.
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