Cash back and travel points are not marketing gifts absorbed by the issuer. They are funded by a fee the merchant pays on each transaction.
Where the money comes from
When a card is used, the merchant receives less than the ticket price. The difference is split among the acquiring bank, the card network and the issuing bank.
The largest slice, interchange, goes to the issuer that lent the money and carries the fraud risk. Rewards are paid out of that slice.
The network sets interchange rates rather than negotiating them individually, which is why the same card costs a small merchant and a large one similar amounts per swipe.
Premium cards carry higher rates
Interchange varies by card tier. A card with generous rewards and a large annual fee generally carries a higher interchange rate than a basic card.
The merchant cannot see which card a customer will present and generally cannot decline one tier while accepting another under network acceptance rules.
This is the structural reason issuers compete on rewards. A cardholder who spends heavily on a premium card generates more interchange revenue.
Debit is regulated differently
Federal law caps interchange on debit cards issued by large banks, which is why debit rewards largely disappeared after the cap took effect.
Smaller issuers below the asset threshold are exempt, so debit interchange is not uniform across the banking system.
The divergence between capped debit and uncapped credit explains why issuers steer customers toward credit products through rewards.
Merchants pass the cost along
Acceptance costs enter pricing like any other operating expense, so posted prices reflect them whether or not a given customer pays by card.
Some merchants now surcharge card transactions or offer a cash discount, practices governed by network rules and by state laws that differ.
Where surcharging is permitted, the cost becomes visible at checkout instead of being spread across all customers in the shelf price.
Why the debate keeps returning
Merchant groups argue the fee is set collectively and cannot be negotiated. Issuers argue it funds fraud protection, credit risk and the guarantee of payment.
Litigation and legislative proposals have addressed routing, acceptance rules and disclosure repeatedly, and outcomes have varied by jurisdiction and over time.
For a cardholder the useful takeaway is factual rather than tactical: the reward has a source, and the source is embedded in prices everyone pays.