Your Credit Card Rewards Are Quietly Funded by People Who Pay Cash

The Part Nobody Prints on the Application

If you carry a rewards card, you've probably made peace with the trade: you pay it off every month, you collect points or cash back, the bank makes its money on people who carry balances. Clean enough. Except that's not really where a big chunk of your rewards comes from.

A Harvard study making the rounds this year estimates that interchange fees — the "swipe fees" merchants pay every time you tap a card — move about $30 billion a year from people who pay with cash and debit to people who pay with rewards credit cards. Your 2% back isn't conjured out of nothing. A meaningful slice of it is paid for by the person ahead of you in line counting out bills.

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How the Subsidy Works

When a store sets a price, it bakes in the cost of accepting cards. It can't legally charge most cash customers a lower price than card customers in practice, so everyone pays the card-inclusive price. If you're swiping a rewards card, you get some of that cost back as points or cash. If you're paying cash, or using a no-frills debit card, you eat the higher price and get nothing in return.

The gap is wider than most people assume, because not all swipe fees are equal:

• Premium rewards cards: ~2.1% average swipe fee
• Basic credit cards: ~1.7%
• Debit cards: under 1% (some are capped by federal law)

So the fancier your card, the more the merchant pays — and the more that cost gets spread across every shopper, including the ones earning nothing.

Who Ends Up Holding the Bill

This is where it stops being an abstract economics debate. The people most likely to pay cash are, broadly, the people who can least afford the markup. Households earning under $25,000 a year pay cash for about a quarter of their purchases. Households above $150,000 pay cash only about 9% of the time. Older shoppers lean on cash more too — roughly 19% of purchases for people 55 and up, versus about 10% for those 25 to 54.

Put those two facts together and the picture is uncomfortable: the rewards I'm enjoying on a premium travel card are partly underwritten by lower-income and older shoppers who never signed up for the game.

Why This Is Suddenly a Fight in Washington

Merchants have been complaining about this for years, and the numbers are finally big enough to get attention. Total card fees paid by U.S. businesses hit roughly $198 billion in 2025 — up about 70% since 2019, driven by more spending, less cash, and richer rewards programs that someone has to fund.

That's fueling two live debates. The Credit Card Competition Act would force the largest banks to enable a second processing network on Visa and Mastercard credit cards, with the goal of injecting price competition into swipe fees. And in January 2026, swipe fees got a fresh round of political attention at the federal level. Banks argue that capping interchange would gut rewards programs — which is true, and also kind of the point of the criticism.

What It Means If You Carry Rewards Cards

I'm not going to pretend the answer is "cut up your cards." The rational individual move, as long as this system exists, is to use a good rewards card and pay it in full. But it's worth seeing clearly:

• Rewards are not free money. They're a redistribution, and you happen to be on the winning side of it.
• If swipe-fee reform passes, expect rewards to shrink. The lush sign-up bonuses and category multipliers are downstream of these fees. Squeeze the fees, and the perks get thinner.
• The smarter play is value, not status. A no-annual-fee 2% card captures most of the benefit without the premium-card swipe fee that makes the subsidy worse.

Do Surcharges and Cash Discounts Fix This?

A growing number of merchants — especially small businesses — have started adding card surcharges (typically 1.5–3%) or offering cash discounts to push back against swipe fees directly, rather than absorbing the cost into one blended price. Where this is legal (rules vary by state, and a handful of states restrict surcharging outright), it actually makes the subsidy visible for the first time: cash payers see a lower price, and card payers see the fee they're generating in real time. If you notice a surcharge at checkout, it's not the merchant being greedy — it's one of the few mechanisms that makes the true cost of card rewards transparent to the person paying it.

Who Actually Sets Interchange Rates

It's worth understanding who's actually setting these fees, since it's not the merchant and it's not really the cardholder either. Visa and Mastercard set default interchange rates that apply across their entire network, while banks that issue cards negotiate their share within that framework — and premium rewards cards are deliberately assigned to higher interchange tiers specifically because the issuer needs that extra revenue to fund the rewards program. This is why a basic no-frills debit card and a premium travel card from the same bank generate very different merchant costs on an identical purchase: the interchange tier is baked into the card product itself, not into how the customer chooses to pay.

Small Businesses Feel This More Than Large Retailers

Large retailers often negotiate better processing rates or absorb interchange costs more easily due to volume, but small businesses — particularly those with thin margins, like restaurants and independent retailers — frequently cite card processing fees as one of their largest fixed costs after rent and labor. This is part of why a growing number of small businesses have started adding explicit card surcharges or cash discounts: it's less about disliking card payments and more about a direct, visible response to a cost structure that scales with premium-card usage in ways a small operation can't easily absorb the way a national chain can.

The Honest Bottom Line

The rewards system works beautifully if you're the one swiping and paying in full. It works against you if you're paying cash. Most of us are in the first group, and there's no shame in playing the game that exists — but it's healthier to know the game is rigged in your favor at someone else's expense, rather than believing the points are a gift from a generous bank.

If reform changes the math, the cards that survive best will be the simple, low-fee earners. We keep a running list of those in our best cash-back cards guide.

Frequently Asked Questions

Do stores really charge cash payers more?

Not directly, in most cases — they set one price that includes the cost of card acceptance, so cash payers pay the card-inclusive price without getting any rewards back. A growing number of small businesses now add card surcharges or cash discounts, but the majority still bundle the cost into one price.

Would the Credit Card Competition Act kill my rewards?

It's the banks' main argument against it. Forcing a second network onto credit cards would likely lower swipe-fee revenue, and rewards are funded largely by that revenue — so generous programs could shrink if it passes. How much is genuinely uncertain.

Do other countries handle interchange fees differently?

Yes — several countries, including those in the European Union, cap interchange fees by law, typically around 0.3% for credit cards, far below the roughly 2% many U.S. premium cards generate. Those caps are also part of why rewards programs in those markets tend to be far less generous than in the U.S., since issuers there have less swipe-fee revenue to fund them with.

What's the most efficient card to use under this system?

A flat-rate, no-annual-fee cash-back card paid in full each month captures most of the value without piling on the higher premium-card swipe fees. Premium cards earn more per dollar but carry the biggest fees of all.

This is a fast-moving policy area — swipe-fee rules and rewards programs can change quickly, so confirm the latest before making decisions. Compare current cards →