The Shift in Credit Card Legislation: What It Means for You

In recent years, there has been a growing focus on credit card legislation at both the federal and state levels. The proposed Credit Card Competition Act sparked interest in how credit card transactions are regulated, but while federal efforts have yet to yield significant changes, state governments are now stepping into the fray. This article will explore the latest developments in credit card legislation across the United States and what they could mean for consumers and small businesses.

To understand the implications of these changes, it’s essential to grasp how credit card transactions work. When you use a credit card for a purchase, the merchant pays an interchange fee, which averages around 2% of the transaction amount. This fee is divided among various parties: the issuing bank, the credit card network (like Visa or Mastercard), and the merchant processing the payment. These fees help ensure transaction security, prevent fraud, and fund rewards programs that offer points, miles, or cash back.

Consumers benefit from these transactions through protections against unauthorized charges and the choice of which card to use. Small businesses also enjoy a streamlined payment process that minimizes the risks associated with cash handling. However, recent legislative proposals at the local level threaten to complicate this straightforward process.

One significant development is occurring in Washington, D.C., where council members are advocating for Bill 26-138. This proposed legislation aims to eliminate interchange fees on sales taxes and gratuities. A similar law was enacted in Illinois, set to take effect on July 1, 2026, which also exempts these components from interchange fees.

At first glance, exempting taxes and gratuities from interchange fees might seem reasonable, as businesses collect these amounts on behalf of government entities or service workers. However, the reality of implementing such a policy is fraught with challenges. For instance, would merchants need to invest in new processing technology to differentiate between taxable and non-taxable portions of a transaction? Would they collect interchange on the entire purchase and then seek refunds for specific components?

Larger retailers, with their extensive transaction volumes and accounting resources, stand to gain the most from these changes. A study by the Electronic Payments Coalition revealed that the 40 largest retailers in Illinois would capture nearly 40% of any interchange savings resulting from the bill, while approximately 1.3 million small businesses would face the burden of compliance without reaping the benefits.

The proposed legislation in Washington, D.C., could significantly impact the consumer experience. Instead of a simple card swipe, transactions may require multiple steps, as small businesses would need to separate purchases into distinct charges for goods and services, taxes, and gratuities. For instance, a diner might pay for their meal with a credit card while needing to provide cash or a check for the tip.

Additionally, there are privacy concerns associated with these legislative changes. If merchants must itemize transactions to avoid interchange fees on certain components, previously private purchases could become less secure as they share more details with third parties.

As of now, Illinois is the only state to have passed such legislation, while around 30 other states have rejected similar proposals due to their potential negative impact on consumers and small businesses. Currently, only Massachusetts and Washington, D.C., have active bills under consideration.

While federal efforts to regulate credit card processing continue, local initiatives are emerging that could reshape the payment landscape. The Illinois law set to take effect in 2026 and the proposed D.C. bill both aim to exempt taxes and tips from interchange fees. However, the implementation of these laws could create confusion for consumers and impose significant burdens on small businesses.

Across all jurisdictions considering such regulations, a common theme emerges: large retailers are likely to benefit the most, while consumers may face a more cumbersome payment process that undermines data protection and rewards programs.

If you want to voice your opinion on these legislative changes, consider reaching out to your elected representatives. Your feedback can play a crucial role in shaping the future of credit card legislation.

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