Cards that return cash or points to the holder have to fund those rewards from somewhere. The largest source is a fee charged to the business accepting the card.
Interchange is the transfer at the centre
On each card purchase, a portion of the transaction value passes from the merchant's bank to the cardholder's bank. That transfer is called interchange.
The card network sets the rates but does not keep the money. It flows to the issuer, which is the institution carrying the credit risk and running the rewards programme.
The merchant sees this only as part of a blended processing charge, so the composition of what is being paid is rarely visible.
Rates vary by card, not by merchant effort
Premium cards carry higher interchange than basic ones, because the rewards they fund are richer. Commercial cards are usually higher still.
The merchant therefore pays more for the same sale depending on which card the customer happens to present, with no ability to influence the choice.
This is the direct link between a generous rewards programme and the cost a retailer bears, and it explains why the most rewarding cards are the least popular with businesses.
The cost reaches every customer
Merchants treat acceptance costs as an operating expense and price accordingly, which means the cost is spread across all prices rather than charged to card users.
The consequence is a transfer from customers paying by cheaper methods toward those holding rewarding cards, since everyone pays the same shelf price.
Where surcharging is permitted, some merchants pass the cost back explicitly, which makes the underlying difference visible for the first time.
Regulation reshaped the market
Several jurisdictions have capped interchange on consumer cards, and the effect on rewards was immediate because the funding source shrank.
Issuers responded by trimming reward rates, adding annual fees, or shifting emphasis toward cards not covered by the caps.
The pattern demonstrates that rewards are not a marketing gift but a redistribution of a fee, and that constraining the fee constrains the reward.
What issuers earn beyond interchange
Interest on carried balances remains a substantial source of income, which is why rewards are marketed heavily to customers likely to revolve.
Annual fees, foreign transaction charges and late fees add further revenue, and premium cards lean on the annual fee to support benefits interchange alone cannot fund.
A cardholder who clears the balance monthly and pays no annual fee is genuinely subsidised, and that subsidy is funded by the customers and merchants who are not.