Every mile, point and cashback percentage your customer earns is funded out of interchange — and interchange is paid by you. The better the card in their wallet, the more that transaction costs you to accept.
The money goes to the bank, not the processor
This is the part most merchants have backwards. Interchange is the largest component of what you pay to accept a card, and it does not go to your payment processor. It goes to the bank that issued your customer's card.
That bank uses it to cover credit risk, fraud losses — and the rewards programme that persuaded the customer to carry the card in the first place.
| Component | Paid to | Roughly |
|---|---|---|
| Interchange | The customer's bank | $1.50 – $2.10 |
| Network assessment | Visa / Mastercard | $0.13 – $0.15 |
| Processor markup | Your payment processor | The remainder |
Better card, bigger bill
Interchange is not one rate. The card networks publish schedules with dozens of categories, and the ones attached to generous rewards sit at the top.
| Card | Relative cost to accept | Who benefits |
|---|---|---|
| Regulated debit | Lowest — capped in the US | Nobody; there is no rewards programme |
| Standard credit | Moderate | Modest or no rewards |
| Premium rewards | High | The cardholder, generously |
| Corporate / business | Highest | The cardholder's employer |
So the customer paying with the metal card that earns lounge access and three points per dollar is the most expensive customer you have — and they are more likely to be your highest-spending one.
The cross-subsidy nobody voted for
Merchants do not usually price differently by payment method. They set one price covering their average cost of acceptance, which means every customer pays a little of it.
A 2010 Federal Reserve Bank of Boston paper by Scott Schuh, Oz Shy and Joanna Stavins argued that this produces a transfer from cash payers to card payers, and — because premium rewards cards are held disproportionately by higher-income households — from lower-income households to higher-income ones.
Why you probably cannot see it on your statement
On flat-rate pricing you pay the same percentage whichever card is used. Your processor absorbs the difference between a cheap debit card and an expensive corporate one, and prices for the average across its whole book.
That averaging has real value — it makes your costs predictable. But it does mean the rewards story is invisible unless you move to interchange-plus, where every category appears as its own line.
Sources
- Scott Schuh, Oz Shy and Joanna Stavins, Who Gains and Who Loses from Credit Card Payments? Theory and Calibrations — Federal Reserve Bank of Boston, 2010.
- Visa and Mastercard published US interchange rate schedules, updated twice yearly.
- Durbin Amendment to the Dodd-Frank Act, 2010 — the statutory cap on regulated debit interchange.
GOOD QUESTIONS
Frequently asked
Who pays for credit card rewards?+
Merchants, through interchange. When a customer pays with a rewards card, the interchange fee is higher, and the issuing bank funds the points or cashback out of that fee. The card network sets the rate; the merchant pays it.
Why does a premium card cost more to accept?+
Because its interchange category is more expensive. Premium rewards, corporate and business cards all carry higher interchange than a basic debit card, and the difference funds the rewards programme the cardholder enjoys.
Can I refuse premium rewards cards?+
Generally not selectively. Card network rules require merchants who accept a network's cards to accept them across the category, so you cannot take basic Visa and decline premium Visa. You can decline an entire network, which is why some merchants historically refused American Express.
Do cash customers subsidise card users?+
A 2010 Federal Reserve Bank of Boston paper argued exactly that: because merchants price to cover their average payment cost, cash payers help fund rewards they never receive, and the transfer tends to run from lower-income to higher-income households.