Credit Cards, Interchange Fees, and the Cost of Government Intervention

Have you used a credit card today? If so, you are not alone. It is estimated that nearly 2,000 credit card transactions are completed nationwide every second. In late 2025, it was estimated that consumers had the choice of 642 different credit cards in the U.S. What was once a convenience has become a fixture of both the domestic and global economy.

At the core of the current credit card systems are interchange fees. Interchange fees are paid by the merchant to the cardholder’s bank when a credit card is used for a transaction. Typically ranging from 1%-3% of the total transaction amount, these fees serve as a mechanism that supports many of the benefits of credit cards such as cashback, rewards programs, and fraud prevention. These benefits are valued by 91% of Americans, with 63% saying they would be disappointed to lose them. Despite the overwhelming approval of these programs, some states are threatening their viability.

Arizona, Oklahoma, Pennsylvania, South Carolina, and Vermont have all seen bills introduced recently to limit these fees and threaten the current credit card system. These bills aim to prohibit interchange fees on tax (and gratuity in the case of the Oklahoma and Vermont bills) portions of the total transaction amount. Such mandates would require payment systems to separate portions of each transaction, resulting in significant compliance and implementation costs. Additionally, the costs of processing payments, managing fraud risk, and maintaining secure payment systems apply to the full transaction, so carving out portions does not eliminate costs but instead could shift them elsewhere.

In 2024, Illinois passed the Illinois Interchange Fee Prohibition Act. Like the aforementioned bills, it prohibits interchange fees on gratuity and sales tax portions of credit card transactions. Following a legal challenge, a judge issued a preliminary injunction blocking enforcement of the law, finding that it may be preempted by federal law. In response, the Illinois legislature voted to extend the effective date from July 1, 2025, to July 1, 2026, pending the court’s decision.

Rather than upending the system enjoyed by millions, the ALEC Resolution Supporting Access to Safe and Reliable Payments Systems opposes government mandates in the credit card space. This resolution supports the competitiveness that exists in the credit card industry today and recognizes that unnecessary intervention will have wide-reaching consequences to both innovation and security. It highlights that, “states should oppose any governmental economic favoritism, wherever proposed, that would negatively impact consumers, provide less choice and access to popular consumer benefits (cashback, rewards programs), threaten airline services, or undermine critical payment fraud protections while increasing national security risks.”

Limiting interchange fees on tips and sales taxes may sound like targeted relief, but it represents another step toward government-managed pricing and away from free-market solutions. Rather than reducing real costs, these policies risk shifting burdens, fragmenting national payment systems, and inviting further regulatory intrusion into private transactions. Instead, states should promote competition, transparency, and choice in the payments market by letting consumers and businesses, not lawmakers, determine how transactions are priced and processed.