Cash back and points feel like a gift from the bank, but they are paid for out of a fee that moves quietly through every card transaction. Understanding that fee explains most of how rewards behave.
Interchange is a fee paid between banks
When a card is used, the merchant's payment processor passes a share of the sale to the bank that issued the card. That share is the interchange fee, and it is set by the card network rather than negotiated store by store.
The merchant never sees interchange as a separate line item. It arrives bundled into the discount rate the processor charges, alongside network fees and the processor's own margin.
Because the fee is a percentage of the sale, a large purchase generates more revenue for the issuer than a small one, which is why some small merchants set minimums for card payment.
Rewards are funded from that revenue stream
An issuer decides how much of its interchange revenue to hand back to the cardholder. Cash back, points and travel credits are all the same expense in different packaging.
This is why reward rates cluster within a narrow band across the market. Issuers are dividing a similar pool of revenue, so an offer far outside the band usually has a limit hidden elsewhere.
Interest and annual fees supplement the pool, but a customer who pays in full every month is funded almost entirely by what merchants pay on their spending.
Premium cards carry higher rates for stores
Networks publish tiered interchange schedules, and cards with heavier reward programs sit in the more expensive tiers. A store accepting all cards from a network accepts the expensive ones too.
Merchants cannot easily refuse a single card type, since network rules generally require honoring all consumer cards in a category. That structure is what keeps premium rewards viable.
Some large retailers respond by pushing their own store card or a bank-transfer option at checkout, where the cost of acceptance is lower.
Debit and credit are treated differently
Federal law caps interchange on debit cards issued by the largest banks, which is why debit rewards largely disappeared from the American market after that rule took effect.
Small issuers are exempt from the cap, and prepaid products follow their own rules. The result is a patchwork where the same swipe costs a merchant different amounts.
Credit interchange has no comparable federal cap, so the credit side of the market retains the revenue that makes generous rewards possible.
The cost reaches shoppers indirectly
Merchants build acceptance costs into shelf prices rather than itemizing them, so everyone pays a similar price whether they use cash, debit or a premium rewards card.
Surcharging and cash discounts are permitted in many states within network rules, which is why occasional gas stations and small shops post two prices.
None of this makes any particular card a good or bad choice for an individual. It simply explains why the rewards exist and where the money comes from.