Off the Record, On the Issues with John

Explore how interchange works; why Illinois’ ruling matters; and what it could mean for credit unions and their members.

By John Alexander, DakCU Director of Legislative & Regulatory Affairs

What Interchange Is
Interchange is a card fee that flows from the merchant’s bank side of a transaction back to the card issuer the credit union that provided the member’s card.
 
It is not the only cost a merchant pays to accept cards, but it is typically the largest component within the total “card acceptance” expense.
 
That revenue supports the real infrastructure behind card payments: fraud monitoring, dispute resolution and chargebacks, tokenization, data security tools, network compliance, and the day-to-day operation of card programs. In short, it helps make modern electronic payments secure and reliable.
 
How a Card Purchase Works (Step-by-Step)
Using a $100 purchase as an example:

1. A member taps, inserts, or swipes their card at checkout.
2. The merchant sends an authorization request through its processor (acquirer) to the card network (for example, Visa), which then routes it to the issuer the member’s credit union.
3. The issuer reviews available funds or credit, fraud indicators, and network rules, then approves or declines.
4. If approved, the member sees “approved” and completes the purchase.
5. Later, the transaction clears and settles, and funds move between the institutions involved.

 
What Money Moves Where
From that $100 transaction:

• The merchant receives the sale amount minus the total card acceptance cost.
• That total cost is divided among several parties:
  • Interchange flows to the issuer (the credit union).
  • A portion goes to the card network.
  • A portion goes to the merchant’s processor/acquirer, which facilitates the transaction and deposits funds.

 
Interchange is therefore embedded in the settlement system itself it is not a separate “add-on,” but part of how the payment engine operates.
 
Why Interchange Keeps Showing Up in Legislatures and Courts
Interchange is a large, visible number in a system most consumers never see. Merchants argue the cost is too high. Issuers and networks argue the fee funds fraud protection, consumer safeguards, and universal card acceptance.
 
Two current pressure points are driving renewed policy attention.
 
1. The National Payment Card Settlement (“BISA”)
The court-authorized settlement website states that businesses that accepted Visa or Mastercard between 2004 and 2019 may be included in a $5.5 billion settlement.
 
The site also reports that the claim filing deadline was February 4, 2025, and that initial partial payments are being issued on a rolling basis.
 
Why this matters for policy: even when litigation focuses on merchants and networks, the public narrative often simplifies to “interchange is unfair.” That framing frequently resurfaces later in state legislation.
 
2. Illinois Interchange Fee Prohibition Act (IFPA)
On February 11, 2026, a federal judge upheld an Illinois law that bans interchange fees on the sales tax and tip portions of card transactions. Opponents have indicated they plan to appeal.
 
This is not a settlement  it is a court ruling allowing the law to stand for now, pending appeal.
 
Why Illinois matters beyond Illinois:
Card payments function best when the rules are consistent nationwide. If individual states require special handling of taxes and tips within settlement systems, the payment rails begin to fragment.
 
State-by-state carve-outs increase operational complexity, technology costs, and compliance risk across the system.
 
The North Dakota Connection: Senate Bill (SB) 2217 (2023)
North Dakota already engaged this issue during the 2023 session through SB 2217.
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The original concept focused on excluding state and local taxes from interchange calculations in card transactions. As the session progressed, the proposal shifted into an interim study. The amended language directed legislative management to examine interchange fees on electronic payments and the impact on merchants of applying interchange to state and local taxes at the point of sale.
 
Why that shift matters:
“Exclude tax from interchange” sounds simple in a headline. In practice, it requires changes at the point of sale, new data fields passed through processors, and modifications to settlement logic that must operate at national scale.
 
That complexity is why many of these proposals evolve into studies, negotiations, or extended implementation debates.
 
Why This Matters for Credit Unions
Interchange is not a side fee it is part of the infrastructure that keeps electronic payments secure, reliable, and universally accepted.
 
The Illinois ruling shows that the tax-and-tip carve-out approach is advancing in at least one state, with appeals ahead. North Dakota tested the same policy concept in 2023 and recognized the operational implications by pivoting to a study.
 
For credit unions, the core risk is predictable:
When interchange is reduced or fragmented by state-specific rules, total system costs do not disappear they shift. Those shifts can appear as higher account fees, fewer rewards, reduced fraud protections, or fewer low-cost products available to members.
 
That is why interchange policy debates are not just merchant issues or network issues they are member impact issues.
 
ViClarity Q1 2026 Town Hall Webinar - Starting 2026 Strong: A Look at Where the Credit Union Industry Stands
March 25, 2026 | 2 p.m. ET / 1 p.m. CT  / 12 p.m. MT / 11 a.m. PT
Join Crystal Streeper of ViClarity for a practical and high-level outlook on emerging regulatory focus areas, examiner expectations, and common compliance pain points credit unions are navigating right now. We’ll connect the dots between what’s happening across the industry and what it means for your compliance program, governance practices, and risk management priorities. Register here. 

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