Who Really Pays for Your Credit Card Rewards?

You buy a $100 pair of shoes with a credit card.

A few days later, you open your card app and see:

+$2 cashback

Nice.

It feels like the credit card company just gave you $2 for free.

But banks are not charities.

So where did that $2 actually come from?

Follow the money behind a single $100 purchase, and credit card rewards start to look very different.

The Store Doesn't Simply Get Your $100

When you pay $100 with a credit card, the money doesn't move directly from you to the store.

Several businesses are involved in processing the transaction, including the card-issuing bank, the merchant's payment providers, and networks such as Visa or Mastercard.

And those services cost money.

One important part of that system is the:

Interchange fee

A 2026 NBER study describes U.S. credit card interchange fees as typically around:

1.9% of the transaction

So on a $100 purchase, think roughly:

$1.90

as a simple example.

The exact amount varies by card, merchant and payment arrangement.

The important point is simpler:

A store does not accept your credit card for free.

Is That Where Your $2 Cashback Comes From?

Partly.

Card-issuing banks receive interchange revenue, which helps support the economics of rewards programs along with other card revenue.

And at the scale of the U.S. banking system, these small fees become enormous.

In 2025, U.S. banks collected nearly:

$66 billion

in credit and debit card interchange fees.

That was up from about $52 billion in 2021 and $64 billion in 2024.

According to the Federal Reserve Bank of St. Louis, interchange fees represented about 11% of U.S. banks' noninterest income in 2025.

Banks use this revenue for things including transaction processing, fraud protection and rewards programs.

But interchange is not the only source of money in the credit card business.

Banks also earn interest and various fees from cardholders.

And that's where the story gets more interesting.

Imagine You Own the Store

Suppose you sell shoes.

Accepting credit cards costs your business money.

What do you do?

You could charge:

Cash customer: $98

Credit card customer: $100

But many businesses instead charge everyone the same price.

So card acceptance becomes another cost of doing business, alongside:

rent,

electricity,

wages,

shipping,

and packaging.

Businesses can ultimately reflect those costs in the prices they charge.

And that creates a strange possibility.

Two People Buy the Same Shoes

Tom buys a pair of shoes.

Price:

$100

He pays with a rewards credit card.

He receives:

$2 cashback

Ignoring other costs, you could think of his net spending as roughly:

$98

Now John buys exactly the same shoes.

Price:

$100

But John pays cash.

His reward:

$0

Both paid the same sticker price.

Only Tom received money back.

If some of the merchant's card-acceptance costs were incorporated into the price of those shoes, John may have paid a price affected by a payment system he didn't even use.

That leads to a surprisingly important economic question:

Are cash customers helping pay for credit card rewards?

Researchers have been studying exactly that.

About $30 Billion May Move Between Consumers

A 2026 NBER study examined payment data involving roughly one million U.S. merchants.

The researchers estimated that the current interchange system creates about:

$30 billion per year

in transfers from cash and debit users toward credit card users.

That's roughly:

$82 million per day.

John isn't literally handing Tom $2.

The transfer is indirect.

It can happen through merchant costs, prices and rewards spread across millions of transactions.

But there's an important catch.

The Simple Story Isn't Quite Right

It is tempting to say:

Cash users lose.
Credit card users win.

Reality is more complicated.

People don't all shop at the same stores.

Some businesses have many cash customers.

Others have more debit users.

Some attract customers carrying premium rewards cards.

Merchants can also face different payment costs.

Economists call part of this phenomenon:

Consumer sorting

When the 2026 researchers accounted for differences in where different types of consumers shop and merchant fee structures, the estimated redistribution was about:

25% smaller

than it would have been without those differences.

So the popular claim:

“Cash users simply pay for rich people's credit card points.”

is too simplistic.

But the cross-subsidy doesn't disappear either.

And there's another part of the credit card system that may matter even more to an individual consumer.

What Happens When the Credit Card Bill Arrives?

Imagine two people.

Both spend:

$3,000 per month

on a 2% cashback credit card.

Both earn:

$60 per month

or:

$720 per year

in cashback.

So far, they look identical.

Then the bill arrives.

Sarah Pays Her Balance in Full

Sarah spends $3,000 every month.

When the bill arrives, she pays the full statement balance.

Assuming she avoids interest and ignoring annual fees or other costs for this simple example:

Annual spending: $36,000

2% cashback: $720

Sarah gets:

$720 in rewards.

If she would have made those purchases anyway, rewards can be genuinely valuable to her.

Mike Carries a Balance

Mike also spends $3,000 per month.

He receives the same 2% cashback.

But Mike doesn't pay his entire balance.

Debt remains on the card.

Then interest begins to accumulate.

Mike may still proudly see:

+$720 rewards

at the end of the year.

But if he paid substantially more than $720 in interest and fees, the rewards did not make him richer.

The bank gave him money with one hand while collecting more with the other.

Real Credit Card Data Shows This Difference

A Federal Reserve study published in 2023 examined detailed U.S. credit card data.

Researchers found that consumers with higher FICO scores tended to earn greater net benefits from rewards cards.

Consumers with lower FICO scores tended to carry more unpaid balances and incur more interest costs, reducing or reversing the value of their rewards.

And here's the surprising part:

Income alone did not explain the difference.

Even some higher-income consumers with lower FICO scores lost out.

So the story isn't simply:

Rich people win.

Poor people lose.

How people manage their credit cards matters enormously.

The researchers estimated roughly:

$15.1 billion per year

in redistribution associated with rewards cards and differences in cardholder behavior.

This is different from the $30 billion estimate above.

The studies are examining different mechanisms.

The 2026 study focuses on transfers between cash/debit and credit card users through merchant pricing and interchange.

The 2023 research examines redistribution among rewards-card users through rewards, interest costs, fees and repayment behavior.

But both reveal the same larger point:

Credit card rewards aren't free money.

So Is Using a Rewards Credit Card Good for You?

It certainly can be.

Imagine you:

pay your statement balance in full every month,

avoid interest,

don't buy unnecessary things just to earn points,

receive benefits worth more than the card's annual fee,

and actually use your cashback, points or miles.

In that situation, you can come out ahead.

Our simple example makes the point.

Spend:

$3,000 per month

for purchases you would make anyway.

Earn:

2% cashback

Pay:

$0 in interest

Annual cashback:

$720

That is real value to the consumer.

Now change one thing.

Start carrying a large balance and paying substantial credit card interest.

Suddenly the same 2% reward can become almost irrelevant.

Go Back to the Original $100 Purchase

You bought:

$100 shoes

and received:

$2 cashback.

Who paid for the $2?

There isn't one simple answer.

The merchant pays to accept credit cards.

Banks receive interchange revenue.

Merchants may incorporate some payment costs into prices.

That can affect customers paying with cash or debit too.

Banks also earn interest and fees from some credit card customers.

And rewards are distributed within this much larger system.

So your $2 didn't come directly from one person's pocket.

It emerged from a network of money moving between:

merchants

banks

payment networks

and

different types of consumers.

The Real Question Isn't Whether Rewards Are Free

In 2025, U.S. banks collected nearly:

$66 billion

in credit and debit card interchange fees.

A 2026 study estimates roughly:

$30 billion

in annual transfers from cash and debit users toward credit card users through the payment system.

A separate 2023 study estimated:

$15.1 billion

in annual redistribution associated with rewards cards and cardholder behavior.

All of this sits behind the tiny numbers we see on our phones:

+$2 cashback

+500 points

+1,000 miles

So perhaps the most interesting question isn't:

“Why is my credit card company giving me free money?”

It's:

“Where did this $2 travel before it reached my wallet?”

And then there's an even more useful question:

“After rewards, interest and fees, am I actually making money from my credit card — or paying for someone else's rewards?”

That answer depends partly on how you use the card.

BEYOND THE OBVIOUS.

Sources