Card rewards look like free money and are funded by a specific and identifiable flow of fees.
Interchange fees
Paid by the merchant's bank to the cardholder's bank on each transaction.
Which is set by card networks and varies by card type.
Premium rewards cards carry higher interchange, which is what funds their rewards.
Merchant discount rate
What the merchant actually pays, incorporating interchange plus processor margin.
Which is a real business cost.
Merchants price to cover it, which means the cost appears in prices for everyone.
The cross-subsidy
Customers paying cash or with basic cards face the same prices as those earning rewards.
Which transfers value toward reward card holders.
Research examining this has found the effect regressive in aggregate.
Regulation of interchange
Caps on debit interchange exist in the United States under specific legislation.
Which did not extend to credit cards.
Markets that capped credit interchange saw reward generosity fall measurably, which demonstrates the funding link.
Surcharging
Merchants passing card costs to customers who use cards.
Which is permitted in many states subject to disclosure requirements and network rules.
Cash discount programmes achieve the same result differently.
Annual fees
Premium cards charge fees offset by benefits.
Which pays only if the benefits are actually used.
Calculating the break-even from your own spending is straightforward.
Interest
Rewards are worthless against interest on a revolving balance.
Which is the arithmetic that determines whether a rewards card benefits you.
These products benefit people who clear balances monthly and cost everyone else considerably more.
The honest summary
Real value, funded by merchant fees embedded in prices, flowing disproportionately to people who already have good credit.
Category bonuses
Higher rates in specific spending categories.
Which are defined by merchant category codes rather than by what you bought.
Purchases at unexpectedly coded merchants earn the base rate, which surprises people.
Sign-up bonuses
Large one-off rewards for meeting a spending threshold.
Which are the most valuable element of most reward programmes.
Spending more than you would have to reach a threshold eliminates the benefit.
Redemption options
Statement credit, transfers to travel programmes or merchandise.
Which have very different values per point.
Merchandise redemption is generally the poorest value and is the most heavily promoted.
Credit reporting effects
Applications, utilisation and account age all affect credit files.
Which matters if a mortgage application is planned.
The arithmetic that decides it
Rewards earned against fees and interest paid. If the second exceeds the first, the card costs money.
Merchant responses
Surcharging, cash discounts and minimum purchase amounts for card use.
Which are permitted subject to disclosure and network rules.
Adoption has increased as processing costs rose.
Debit versus credit
Debit interchange is capped for larger issuers under specific legislation.
Which is why debit rewards are minimal compared with credit.
The regulatory difference is the entire explanation.
Buy now pay later comparison
Merchant-funded instalment products carry higher merchant fees than cards.
Which merchants accept for the conversion benefit.
These generally lack the statutory protections that credit cards carry for purchases.
Fraud liability
Card networks and law provide protections for unauthorised transactions.
Which is a genuine benefit independent of rewards.
Liability limits and dispute processes are defined in regulation.
Deciding on a card
Match rewards to your actual spending, count the fee, and never carry a balance on a rewards card.
Where the money comes from
Merchant fees embedded in prices paid by every customer, including those who pay cash and earn nothing.
That flow is well documented and is the reason the products exist.
Who they benefit
People with good credit who clear balances monthly and spend in the bonus categories, which is a specific and not universal group.
Where to read more
Central bank and regulator research on interchange and its distributional effects is published openly.
Which is drier and considerably more informative than any comparison site's account of rewards.
Network interchange schedules are also published.
A closing observation
Rewards are funded by merchant fees embedded in prices that everyone pays, including customers who pay cash and receive nothing.
That makes the system a transfer rather than a creation of value, and knowing which side of the transfer you are on is worth the five minutes it takes to work out.
A practical checklist
Match the reward structure to where you actually spend, count the annual fee against realistic earnings, and never carry a balance on a rewards card.
Those three steps determine whether the product benefits you, and none of them requires any product comparison.
The distributional finding
Research examining the interchange system has generally concluded that it transfers value from cash and lower-income card users toward premium reward card holders, since prices reflect the average cost of acceptance.
That is a documented finding rather than an opinion, and it is the reason interchange regulation has been debated in several jurisdictions.