FDIC Proposes a Fix for a State Charter Parity Gap

When a community bank’s customer uses a debit card at an out-of-state merchant, whose law governs the bank’s interchange fee? Until recently, the question rarely arose, because no state had sought to regulate interchange fees directly. A recent wave of state legislation has changed that.

The first, Illinois’ 2024 Interchange Fee Prohibition Act, bars card issuers, networks and acquirers from charging interchange fees on the tax and tip portions of electronic payments and restricts use of related transaction data. The law, which is not limited to Illinois-chartered banks, carries penalties of $1,000 per transaction and takes effect July 1, 2027.

For state-chartered banks, the law’s reach remains unsettled. After the Office of the Comptroller of the Currency concluded that federal law preempts the law for national banks, a federal court enjoined its enforcement against national banks and against state banks chartered outside Illinois that are subject to the federal interstate banking statute. The Illinois attorney general has argued, however, that this statute extends national bank preemption only to state banks with branches physically located in Illinois. On that reading, a state bank whose cards are used in Illinois, but which has no branch presence there, could remain subject to the law, while its national bank competitors are exempt regardless of their branch footprint.

The FDIC’s Proposal
On September 17, 2026, the Federal Deposit Insurance Corp. proposed a rule to close that gap. The statute at issue, Section 24(j) of the Federal Deposit Insurance Act, was enacted through the interstate banking legislation of the 1990s to preserve competitive parity between state and national banks operating across state lines. By its terms, it addresses only branches: Host state laws apply to an state bank to the extent they apply to a national bank. Read literally, a state bank benefits from national bank preemption only where it has a physical branch in the host state. The FDIC’s proposal would extend that benefit to a state bank’s interstate services provided without a branch. If a host state law is preempted for out-of-state national banks, whether through OCC action or a federal court ruling, it also would not apply to an out-of-state state bank operating in that state, with or without a branch. The bank’s home state law would govern instead.

The proposal also has clear boundaries. The FDIC would not decide whether a particular state law is preempted. With or without a branch, a state bank would receive only the treatment out-of-state national banks already receive, typically as determined by OCC action or a federal court ruling. Nor would the rule affect state banks’ separate authority to export their home state’s interest rates. And it would offer no relief in a bank’s home state: The 235 state banks headquartered in Illinois would still be required to comply with the Illinois law.

The FDIC estimates its proposal would spare state banks roughly $308 million in one-time system upgrade costs and $6.7 million in annual compliance costs under the Illinois law alone, and 11 other states have begun pursuing similar legislation. A patchwork of state payment laws is the kind of burden that falls hardest on smaller institutions.

More broadly, the proposal bears on the value of the state charter itself. If state banks must follow host state laws that national banks can disregard, the economics of the state charter erode. FDIC Chairman Travis Hill and the Conference of State Bank Supervisors have both framed the proposal as preserving competitive balance between the two charters.

Questions for the Board
The rule is not final, and its durability is uncertain. The FDIC’s broader reading of Section 24(j) rests on the statute’s structure and purpose rather than its express text, an approach the Supreme Court has viewed skeptically since ending judicial deference to agency interpretations in 2024.

Boards should consider:

• Does the bank have branches in Illinois or other states pursuing similar laws? If not, do its customers, merchants or digital channels reach those states?
• What is the bank’s core processor’s plan for these laws, and who will bear the cost?
• Should the bank comment, directly or through its state bankers’ association, within the 60-day comment period?
• Does the bank’s charter strategy assume parity with national banks that may not hold if the rule is struck down?

The proposal could remove a competitive disadvantage for state-chartered community banks. But with the Illinois law’s July 2027 effective date approaching and other states following, boards should plan for both outcomes.