Interchange fees are a component of the cost merchants incur to accept debit and credit card payments. These fees compensate card-issuing banks for the costs and risks associated with facilitating electronic transactions, including fraud prevention, transaction authorization, cybersecurity investments, customer service and dispute resolution. In return for supporting these functions, interchange helps provide merchants with secure payment processing, payment guarantees and increased sales volume. Meanwhile, consumers enjoy secure, convenient access to their funds, rewards programs and robust protection against fraud.
Interchange fees support the sophisticated infrastructure that allows transactions to be authorized, routed, settled and protected within seconds. The modern payments ecosystem has been developed and refined over several decades. Financial institutions, payment networks, processors and merchants have invested substantial resources to build a system capable of securely authorizing and settling billions of transactions each year. Because of its interconnected nature, changes to one part of the system often have implications across the broader payments chain.
Federal intervention
In 2010, Congress enacted the Durbin Amendment as part of the Dodd-Frank Act, imposing price controls on debit card interchange fees for financial institutions. At the time, supporters argued that reducing interchange fees would lower prices for consumers. However, many studies found little evidence that these savings were passed down to the consumer. Ultimately, these federal changes reduced interchange revenue for many financial institutions to the benefit of large retailers. This forced many banks, in particular smaller community banks, to reduce certain banking services such as free checking accounts and additional investment in fraud prevention.
States split
The interchange fee debate is no longer confined to federal discussions. Several states have recently considered legislation targeting interchange fees. These proposals generally seek to prohibit interchange fees on sales taxes and tips, requiring payment systems to separate taxable and non-taxable portions of transactions. While the concept may appear simple, implementation would require significant modifications to the payment processing systems, merchant software and transaction-routing infrastructure across multiple participants in the payments chain, often harming consumers in the process.
For Indiana bankers, these developments warrant close attention.
States have reached different conclusions on these proposals. In Colorado, lawmakers approved legislation that would have prohibited interchange fees on sales taxes for certain large financial institutions and payment card networks. However, Governor Jared Polis ultimately vetoed the measure, citing legal concerns, operational feasibility challenges and uncertainty surrounding how a state-specific carveout could be implemented within the national payments system. Illinois took a different approach by enacting the Interchange Fee Prohibition Act. However, amidst ongoing litigation and regulatory challenges, the Illinois General Assembly recently passed a measure that would delay implementation of the law until July 1, 2027, marking the second postponement since the law was originally scheduled to take effect on July 1, 2025. The delay comes as litigation challenging the law continues to move through the federal courts.
Hitting home
These policy debates reached Indiana during the 2026 legislative session, when legislation was introduced to regulate interchange fees. Similarly to Illinois’ IFPA, the Indiana bill would have excluded taxes and tips from the total amount attributable to the interchange fee. It also would have prohibited large card issuers and payment networks from establishing interchange fee schedules in the traditional manner. The bill would have disrupted the existing payment card system by requiring merchants, processors, networks and financial institutions to develop new methods for calculating, tracking and settling transactions. The resulting operational complexity could increase compliance and technology costs for payment processors and businesses, particularly smaller businesses and local financial institutions.
Fragmenting the dual banking system
The debate surrounding interchange fees reached a significant milestone earlier this year. In April, the Office of the Comptroller of the Currency issued an interim final order concluding that federal law preempts the IFPA with respect to national banks and federal savings associations. The OCC also issued an interim final rule reaffirming the longstanding authority of national banks to charge non-interest fees, including interchange fees, regardless of whether those fees are established directly by the bank or through third-party arrangements.
The OCC’s determination that federal law preempts the IFPA for national banks and federal savings associations creates the potential for a fragmented regulatory environment. As a result, state-chartered institutions may face compliance obligations and legal uncertainty that do not apply to national banks, federal savings associations or out-of-state state-chartered banks, ultimately creating the possibility of uneven regulatory treatment among institutions competing in the same marketplace in states that enact interchange restrictions similar to Illinois.
Eye to the future
For Indiana bankers, these developments warrant close attention. Proposals that alter interchange fees or impose new payment processing requirements can have far-reaching consequences that extend well beyond the payments industry. They can affect fraud prevention efforts, cybersecurity investments, consumer rewards programs, access to banking services and the overall efficiency of the electronic payments system that consumers and businesses rely upon.
The IBA will continue monitoring developments at both the federal and state levels while advocating for policies that preserve a secure, reliable and competitive payments ecosystem. As discussions surrounding interchange fees continue to evolve, ensuring banks have a voice in those conversations will remain critical to protecting the customers and communities they serve.
