While intended to reduce merchant costs and ensure employees receive their full gratuities, this legislation introduces significant challenges for the payment ecosystem, creating ripple effects for banks, payment processors, and consumers.

Impact on the Banking Industry:

• Increased Compliance and Operational Costs: Banks and payment processors must implement complex systems to segregate tax and gratuity amounts during transaction processing. This mandates substantial infrastructure upgrades, creating costly administrative burdens.
  • No system currently separates interchange fees from payments, making it almost impossible to implement a new system within the two-year implementation deadline for the whole state.
  • Every store that accepts electronic payments must install new point-of-sale machines. Merchants, not banks, would have to invest heavily in these systems, and the costs would be passed on to the consumer. 
• Revenue Reductions: Interchange fees are a critical funding source for fraud prevention, transaction security, and maintaining reliable payment networks. Reducing these fees directly impacts banks’ ability to sustain these vital services.
• System Inefficiencies: Adjusting payment systems to comply with the law could disrupt existing processes, resulting in inefficiencies and delays that undermine the seamless transaction experience customers and merchants rely on.

Impact on Consumers:

• Reduced Security and Convenience: Interchange fees are pivotal in funding security measures to prevent fraud and data breaches. Reducing available resources could compromise these protections, exposing consumers to more significant risks.
• Fewer Payment Options: Businesses dealing with higher administrative costs may limit credit card usage or impose surcharges, which reduces consumer choice and convenience in payment methods.
• Higher Costs Passed to Consumers: To recover from revenue losses and higher compliance costs, merchants might pass on these expenses by increasing fees or other charges, ultimately leading to higher costs for consumers when using their services.

Impact on Washington State

• A similar law passed in Illinois last year, and shortly after, the state was sued for violating federal banking laws.
• A court issued a preliminary injunction, holding that the National Bank Act pre-empts state law in this area and, therefore, the plaintiffs will likely win on the merits.
• 29 other states have considered and rejected similar bills. 

While well-intentioned, this legislation threatens to destabilize the intricate payment ecosystem that balances affordability, security, and efficiency for merchants and consumers alike. 

SB 5070 risks creating unintended consequences that outweigh its intended benefits by undermining the financial sustainability of payment systems.