CUs have another year to comply with Illinois’ interchange, preemption question remains

William Wille, Managing Editor, The Credit Union Connection

Illinois just hit the snooze button on its controversial Interchange Fee Prohibition Act (IFPA), pushing implementation back another year to July 1, 2027.

For credit unions and other financial institutions, the delay, approved with SB 3645, provides welcome breathing room. It gives lawmakers, regulators and industry stakeholders additional time to work through the operational, legal and compliance questions surrounding one of the most closely watched payments laws in the country.

But during a recent Credit Union Connection roundtable featuring Defense Credit Union Council Chief Advocacy Officer Jason Stverak, Atlas Advocacy Partner Elizabeth Eurgubian and McKechnie LLC Principal John McKechnie, the conversation quickly moved beyond the extension itself and toward a more fundamental question:

Do federal credit unions have the same preemption protections as federally chartered banks?

The answer remains uncertain, and that uncertainty is becoming increasingly difficult for the industry to ignore.

“While it’s good news that the Illinois Legislature has delayed implementation of the bill for a year, the implications of this situation go far beyond one state. In fact, I am concerned that this will end up being a classic example of winning the battle but losing the war,” said Henry Meier, Esq., The Law Office of Henry Meier, Esq.

He continued, “Going into this litigation, the banking and credit union industries were so confident that they would both be entitled to preemption for federal charters that they jointly filed the lawsuit. In contrast, we now have a District Court decision holding that federal credit unions have much less preemption of protection than banks. Unless this cased is reversed, it puts the federal credit unions of Illinois at a structural disadvantage to their baking counterparts and could be used as persuasive authority across the country to question the applicability of state law to federal credit unions.”

Since its passage, the Illinois law has generated concern among financial institutions, payment networks and processors. Critics argue that the measure could increase operational complexity, complicate fraud prevention efforts and create compliance fiascos for institutions serving members across multiple states.

The Illinois Credit Union League (ICUL) supported the extension, which allows legal challenges to continue moving through the courts while stakeholders evaluate the law’s broader implications.

“Credit unions strongly support efforts to protect consumers and maintain a safe, reliable and efficient payments system,” ICUL President/CEO Libby Calderone said. “This extension provides much needed certainty to preserve the strength and integrity of the electronic payments infrastructure that Illinois families depend on every day.”

Ashley Sharp, ICUL’s Chief Legal Officer and Senior Vice President of State Advocacy, said the delay provides policymakers and stakeholders additional time to evaluate the legal, operational and consumer implications associated with the law.

In practical terms, the industry has gained another year, however, whether that year resolves the larger legal questions remains to be seen.

For federally chartered banks, many of those protections are grounded in the National Bank Act and related federal statutes. Federal credit unions operate under a different statutory framework through the Federal Credit Union Act.

For years, that distinction attracted relatively little attention. In practice, many assumed that federal credit unions would receive treatment similar to federally chartered banks when questions of federal authority arose.

The Illinois litigation has prompted a closer examination of that assumption.

“Credit unions now have been left at the curb basically twice,” Stverak said during the roundtable, referencing recent court decisions that have treated banks and credit unions differently in the Illinois case.

A key issue appears to be the statutory language courts are relying upon.

Eurgubian noted that several of the statutes supporting federal bank preemption simply do not apply to credit unions in the same way.

“The banks were covered under that but the credit unions weren’t,” she explained.

That distinction may seem technical, but it could have significant implications if courts continue to analyze federal banks and federal credit unions separately rather than treating them as similarly situated institutions.

Earlier this year, the National Credit Union Administration submitted an interim final rule asserting that federal law preempts the Illinois interchange statute for federal credit unions.

The move mirrors action previously taken by the Office of the Comptroller of the Currency for federally chartered banks and was welcomed by many industry advocates seeking regulatory clarity.

At the same time, some observers caution that the issue is far from settled.

Following the Supreme Court’s 2024 decision in Loper Bright Enterprises v. Raimondo, courts are no longer required to give the same level of deference to federal agencies that existed under the Chevron framework. As a result, courts may take a closer look at the statutory basis for any preemption claim.

McKechnie acknowledged that uncertainty remains.

“Put me down as a little bit nervous about this,” he said during the roundtable discussion.

While many expect the NCUA’s action to strengthen the industry’s position, McKechnie noted that the final outcome remains difficult to predict until the rule is finalized and courts have an opportunity to weigh in.

“We’ve always seemed to have been left at the curb when it comes to relief in this issue,” he added.

For credit unions, that uncertainty may prove as significant as the Illinois litigation itself.

Why does this matter beyond a legal debate?

Because if courts ultimately conclude that credit unions do not enjoy the same level of federal preemption as banks, state-by-state payment legislation could become much more consequential for credit unions than it is for their banking counterparts.

While Illinois remains the most closely watched battleground, lawmakers in several states have explored legislation affecting interchange fees and payment systems. In Colorado, Governor Jared Polis recently vetoed SB26-134 after credit unions and industry groups argued the measure would create operational challenges, increase compliance burdens and disrupt a payments system relied upon by millions of consumers and businesses.

The Colorado debate reinforced a broader reality: concerns over interchange regulation are no longer confined to Washington, D.C. Increasingly, those battles are playing out in state capitols.

During the roundtable discussion, Stverak pointed to proposals in states such as Colorado, Pennsylvania and New York as evidence that the issue continues to gain traction.

“You are creating a 50 state different payment patchwork network,” he said.

For credit unions serving members who travel, relocate or conduct business across state lines, that prospect presents both operational and compliance challenges.

Stverak recalled a conversation with the CEO of a large Midwestern credit union who joked that, had Illinois’ law taken effect as originally scheduled, institutions might have needed to warn members that their cards would not function the same way while traveling through the state.

The comment was made in jest, but it reflected a serious concern shared by many industry leaders.

As more states consider their own approaches to interchange regulation, credit unions face the possibility of navigating a growing patchwork of rules governing the same payment systems their members use every day.

The Illinois extension is helpful. It delays implementation, preserves stability and allows litigation to continue.

What it does not do is answer the larger question that continues to surface in courtrooms, regulatory filings and industry discussions:

How much federal preemption protection do federal credit unions actually have?

The answer could influence not only the future of the Illinois interchange law but also how credit unions respond to similar challenges in other states.

For now, the industry has another year to seek clarity.

Whether that clarity comes from regulators, the courts or Congress remains uncertain. What is becoming increasingly clear, however, is that the answer may shape how federal credit unions navigate state regulation for years to come.