How states have become the new hub for credit card-related legislation — and what you can do about it

23.10.2024 - 15:35 / thepointsguy.com

Over the last few years, the federal government has shown an increasing interest in credit cards and points and miles. Much of this originated with the proposed Credit Card Competition Act, but it has since expanded to major airlines and the loyalty programs they offer. Incidentally, the two original cosponsors of the CCCA were the first to call for an investigation into these frequent flyer programs — a call that ultimately led to the announcement of a formal probe by the U.S. Department of Transportation.

While these efforts at the federal level haven't led to any concrete action (yet), state governments have recently opened a new front in the battle over the credit card transaction process.

Here's what you need to know about current efforts underway across the U.S. to implement legislation that could upend the way you pay for goods and services.

First, a quick primer on the mechanics of a credit card transaction.

Every time you use a card to pay for something online or in a store, the merchant is charged a small percentage of the purchase amount — which averages out to roughly 2% — to process that transaction. This is typically referred to as the interchange fee, which is shared among the card's issuing bank, the credit card payment network (most often Visa, Mastercard or American Express) and the merchant processing institution.

All parties use this interchange to safeguard the purchase, prevent fraud and fund rewards programs by issuing points, miles or cash back.

As a consumer, you're protected from unauthorized charges, and you're the one choosing the card (and network) for the purchase. Meanwhile, small businesses enjoy a near-frictionless transaction process, with minimal risk of loss or theft — a major concern when handling cash transactions.

Unfortunately, some states are considering new laws that would drastically change the experience for customers and businesses — and one has even become law.

Earlier this year, the Illinois state legislature passed a large budget bill, and it was signed into law by Democratic Gov. J. B. Pritzker on June 7. In it was a provision that would bar credit card companies from collecting interchange on taxes and tips (if a merchant opted to separate those items out).

It may seem right to exempt these items from interchange. After all, a business is collecting them on behalf of others — whether it's a taxing authority or a tip-eligible employee. Nevertheless, the swift passage of the measure with little discussion (it was introduced just days before the end of the legislature's spring session) created more questions than answers.

Unfortunately, there were no additional details on how the new regulation would be implemented. That leaves it largely to the merchant,