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The OCC Preempts Illinois's Interchange Ban — and Sends a Message to Every State Considering One

How the OCC's interim final order preempts Illinois's IFPA, the legal architecture behind it, and what it signals to other states eyeing interchange caps.

By Lex, LexRegPulse Analyst · ·10 min read
Primary-source research · AI-drafted · human-reviewed. Methodology

The OCC Preempts Illinois's Interchange Ban — and Sends a Message to Every State Considering One

By Lex

The OCC's April 29, 2026 Federal Register publication of its interim final order preempting the Illinois Interchange Fee Prohibition Act (IFPA) is structured to take effect June 30, 2026 — one day before the state law it targets would otherwise go live. That timing is not coincidental. It is the OCC advertising that it intends to be the last word on national bank payment revenue before state legislation can reach the starting line.

For compliance teams at national banks, federal savings associations, and federal branches, the operational answer is immediate: those institutions are neither subject to nor required to comply with the IFPA. But the piece of this order that will matter for years beyond Illinois is not the operative paragraph — it is the legal architecture the OCC built to support it, and the explicit policy statement embedded in that architecture about what happens when other states try the same thing.

Background: How Illinois Got Here

The IFPA (815 Ill. Comp. Stat. 151/10-1 et seq.) was enacted in June 2024 as part of Illinois's budget legislation. The law has two operative provisions: (1) a prohibition on card issuer banks, card networks, acquirer banks, and other payment participants from charging or receiving interchange fees on the tax or gratuity portions of payment card transactions; and (2) a data use limitation barring any entity other than the merchant involved in processing a transaction from distributing, exchanging, or using transaction data except to facilitate the transaction or as required by law. Violations of the interchange prohibition carry a civil penalty of $1,000 per transaction. Violations of the data use provision trigger the Illinois Consumer Fraud and Deceptive Business Practices Act.

The Illinois General Assembly originally scheduled the IFPA for a July 1, 2025 effective date, but an overwhelmingly bipartisan legislature voted to delay it by one year — moving implementation to July 1, 2026 — to allow litigation to proceed.

That litigation, Illinois Bankers Association v. Raoul (No. 24-cv-07307, N.D. Ill.), began in August 2024 when the American Bankers Association, Illinois Bankers Association, America's Credit Unions, and the Illinois Credit Union League filed suit challenging both provisions on federal preemption grounds. The Northern District granted a preliminary injunction for national banks in December 2024. Then, on February 10, 2026, the district court reversed course in a summary judgment opinion (Ill. Bankers Ass'n v. Raoul, 2026 WL 371196, at \*13 (N.D. Ill. Feb. 10, 2026)) — upholding the interchange fee prohibition while permanently enjoining the data use limitation. The court's reasoning on interchange fees rested on a single factual premise: payment card networks, not banks, set interchange rates, so the IFPA does not "directly regulate" banks. The ABA filed its appeal in the Seventh Circuit on February 13, 2026.

Four months before the IFPA's July 1 effective date, with the Seventh Circuit appeal pending and expected to be expedited ahead of the IFPA's effective date, the OCC declined to wait for the courts and moved on its own authority.

What the OCC Actually Did: A Two-Document Strategy

Understanding the April 29 action requires reading both instruments together. The OCC did not issue just a preemption order — it simultaneously issued an interim final rule amending 12 CFR 7.4002 (the national bank non-interest charges and fees regulation), published as OCC Bulletin 2026-18, Docket ID OCC-2026-0430.

The two-document approach was deliberate. The district court's February ruling rested specifically on the finding that 12 CFR 7.4002 "is not to protect fees centrally established by a third-party company." The OCC's interim final rule amends § 7.4002 to make that interpretation impossible to maintain. The revised rule adds a definition of "charge" covering any action taken "directly or indirectly, through intermediaries, partners, payment networks, interchanges, or other third parties, assess, collect, impose, levy, receive, reserve, take, or otherwise obtain, including through a fee sharing or similar economic relationship." It adds interchange fees from credit and debit card operations as an express example of non-interest charges under subsection (b). And it makes explicit in new subsection (c)(2) that decisions about fees "set by or in consultation with third parties" are national bank business decisions within § 7.4002's protection. The interim final rule takes effect June 30, 2026.

With the regulatory basis fortified, the preemption order (OCC Bulletin 2026-17, Docket ID OCC-2026-0431) then applies the constitutional conflict preemption analysis to both IFPA provisions. The order is unequivocal: "The National Bank Act, the Home Owners' Loan Act, and the regulations promulgated thereunder preempt the IFPA's interchange fee prohibition and, separately, the IFPA's data use limitation with respect to national banks and Federal savings associations." The two conclusions are also explicitly severable from one another — if a court vacates either, the other remains operative.

The Preemption Standard: Barnett Bank + Cantero, Not Field Preemption

The OCC applied conflict preemption under the Barnett Bank of Marion Cnty., N.A. v. Nelson, 517 U.S. 25 (1996) standard: state law is preempted when it "prevents or significantly interferes" with a national bank's exercise of its federal powers. The Barnett Bank Court also established that federal grants of authority to national banks are "not normally limited by, but rather ordinarily pre-empt[], contrary state law." This creates a structural presumption in favor of preemption that differs meaningfully from the ordinary Supremacy Clause analysis in other regulatory contexts.

The OCC also built its analysis around Cantero v. Bank of America, 602 U.S. 205 (2024), the Supreme Court's 2024 decision reaffirming Barnett Bank and instructing lower courts to base preemption on "a practical assessment of the nature and degree of the interference caused by a state law." Cantero enumerated six antecedent cases that "furnish content" to the standard, and the OCC's order applies three directly to the IFPA: under Fidelity Federal Savings & Loan Ass'n v. de la Cuesta, 458 U.S. 141 (1982), the interchange fee prohibition restricts a national bank's flexibility to determine appropriate compensation — preempted. Under Franklin National Bank of Franklin Square v. New York, 347 U.S. 373 (1954) — which Cantero called the "paradigmatic example of significant interference" — the prohibition impairs a national bank's efficient and effective participation in card networks. Under First National Bank of San Jose v. California, 262 U.S. 366 (1923), the fee prohibition "qualifies a Federal power in an unusual way." The OCC concluded the IFPA satisfies all three prongs.

One procedural point practitioners need to internalize: the OCC explicitly determined that the IFPA is not a "State consumer financial law" within the meaning of 12 U.S.C. 25b. Under 12 U.S.C. 25b(a)(2), that definition covers a state law that "directly and specifically regulates the manner, content, or terms and conditions of any financial transaction ... with respect to a consumer." The OCC's position is that the operative interchange fee transaction runs between a merchant and the card network participants — not a consumer — and the data use limitation is not a financial transaction at all. This matters: if the IFPA were a "State consumer financial law," the heightened procedural requirements and the Skidmore-style deference framework from Cuomo v. Clearing House, 557 U.S. 519 (2009) would apply. By sidestepping 25b, the OCC also invoked an emergency exception under 12 U.S.C. 43(c)(3), bypassing notice-and-comment on grounds that notice was "impracticable" given a "serious and imminent threat to the safety and soundness of any national bank." The estimated magnitude supports that characterization: the OCC calculated that OCC-supervised issuer banks would lose approximately $200 million in interchange revenue if required to comply with the IFPA, with system upgrade costs exceeding $232 million industry-wide.

What the Order Does NOT Cover: The Coverage Gap That Compliance Officers Cannot Miss

The preemption order expressly applies only to national banks, federal savings associations, and federal branches and agencies of foreign banking organizations — the universe of OCC-supervised institutions. Every other payment participant operating in Illinois remains subject to the IFPA, at least unless other federal law provides independent preemption cover:

This gap matters operationally for BaaS structures where national banks issue cards but program management and payment processing sit in nonbank fintechs. The OCC's protection extends to the national bank issuer, not to its fintech partners performing those functions. Bank compliance officers should map their card program structures against this coverage gap immediately.

The Template Effect: Eleven States Are Watching

The non-obvious strategic dimension of this order is what it signals for legislation pending in other states. According to the Electronic Transactions Association, as of 2025 California, Colorado, Nevada, Texas, and Vermont were among at least 11 states considering legislation modeled on or similar to the IFPA. The February 2026 district court ruling partially upholding Illinois's law gave those legislative efforts new momentum — the Illinois Retail Merchants Association called the decision "a roadmap for other states."

The OCC's order is the counter-roadmap. The agency's patchwork-effect analysis — explicitly developed in the order's Section II.D — provides the doctrinal basis for applying preemption to any state that follows Illinois. The order quotes First National Bank of San Jose directly: "If California may thus interfere other states may do likewise; and... varying limitations may be prescribed." That sentence is not included for historical texture — it is a notice to Sacramento, Denver, Austin, and Montpelier. The OCC has pre-populated the preemption record for the next state that moves.

The amended 12 CFR 7.4002, effective June 30, 2026, now explicitly includes interchange fees within the category of national bank non-interest charges that federal preemption protects. That codification makes any future state interchange restriction facially in conflict with a federal regulation, strengthening the preemption case against all future IFPA variants under Loper Bright Enterprises v. Raimondo (2024): courts reviewing such a challenge would interpret 12 CFR 7.4002's unambiguous text, not defer to an agency's position on what it ambiguously means.

Litigation Risk and What Comes Next

The Seventh Circuit remains the most immediate variable. The Seventh Circuit appeal in Illinois Bankers Association v. Raoul is on an expedited track aimed at a decision before the IFPA's July 1 effective date — with the OCC's order as new factual backdrop. If the Seventh Circuit reverses the district court and finds the interchange fee prohibition preempted by federal law, the preemption order is effectively mooted for the Seventh Circuit but remains as regulatory precedent nationally. If the Seventh Circuit affirms the district court's upholding of the interchange fee prohibition, the result is a direct conflict between the federal appellate court and the OCC's interim final order — a circuit-agency conflict that creates immediate APA litigation exposure for the order itself and raises the prospect of Supreme Court review.

Illinois can also challenge the order directly in federal court on APA grounds, arguing that the OCC's invocation of the 12 U.S.C. 43(c)(3) safety-and-soundness emergency exception was insufficient to justify bypassing the standard notice-and-comment process. The OCC acknowledged this risk in the order and offered dual justifications — the emergency exception and an alternative holding that the order does not constitute a "preemption determination" requiring section 43 notice at all. Whether courts accept the latter will be a significant question.

Comments on the order and the companion interim final rule are due May 29, 2026 (30 days after Federal Register publication). Both instruments take effect June 30, 2026, barring a court order.

Bottom Line

National banks and federal savings associations do not need to comply with the IFPA. The OCC's order is operative, well-grounded in Barnett Bank and Cantero conflict preemption doctrine, and fortified by a concurrent 12 CFR 7.4002 amendment that directly addressed the district court's third-party-setting rationale. The order's severability clause means partial judicial reversal does not unwind the entire preemption.

What this order does not do is resolve the payments ecosystem's compliance problem. State-chartered banks, credit unions, and nonbank payment participants remain exposed until other courts rule or other federal agencies act. And the Seventh Circuit's May 13 arguments could, within weeks, either vindicate or complicate the OCC's position.

The order's lasting significance may be less about Illinois than about the 10 or 11 states that have not yet acted. The OCC has announced the cost of trying.

Sources consulted for this piece (fetched during this research session):