Who Pays for Credit Card Rewards?

Business owners and the unbanked subsidize wealthy shoppers.

June 08, 2021

Credit Cards

ALEXANDRIA, Va.—The cash consumers receive for using their rewards cards often come at the expense of someone who can’t afford it, according to Vox.com. Many cardholders assume that those rewards come from the bank, but it’s more likely that fellow consumers and businesses are picking up the tab for these so-called freebies.

Every time a credit card is swiped, the bank charges the business operator a swipe fee, which allows credit card issuers to give customers rewards like points-funded hotel rooms and cash back. That drives up prices and means that cash users are often subsidizing the perks going to credit card users.

“You have this phenomenon at the point of sale, which is consumers who use credit cards—and rewards cards more specifically—tend to be cross-subsidized by consumers who use cash or debit cards,” said Joanna Stavins, senior economist and policy adviser, the Federal Reserve Bank of Boston.

Credit card issuers make money in four ways: fees for having the card, penalties on late payments, interest on credit card balances and swipe fees, which are the amount the credit card companies charge every time consumers swipe their cards. Generally, issuers charge more than 2% of the total transaction amount in swipe fees, which can mean big profits for credit card issuers. In 2019, merchants paid more than $67 billion in Visa and Mastercard credit card swipe fees alone.

“The interchange is a steady, almost annuity kind of revenue stream,” Ted Rossman, senior industry analyst at Bankrate and CreditCards.com told Vox. He estimates swipe fees currently average about 2.3%, and the more elaborate the rewards card, the higher the fees. “Merchants hate paying interchange fees, but if you don’t accept credit cards, you’re turning off a huge part of your audience.”

Part of the money that banks get from swipe fees goes back to customers in the form of rewards. About seven in 10 Americans have at least one credit card, and many have multiple. Most credit spending takes place on rewards credit cards, and over the years, reward options have expanded as companies get more competitive, offering more cash back and perks, such as free hotel rooms.

Credit card swipe fees remain one of the highest operating costs for convenience store retailers, according to NACS State of the Industry data. Consumer preferences for more touch-free transactions and the coin circulation challenge in summer 2020 led to record debit and credit card usage at convenience stores. In 2020, 74.6% of all transactions were paid by plastic, and overall card fees paid by the convenience store industry were $10.7 billion.