Where does your cash back actually come from?
Two percent back feels like the bank being generous. It is closer to a refund of a fee you never see. Each time you pay with a credit card, the store pays to accept the card. The part of that cost that goes to the bank that issued your card is called interchange, or the swipe fee.
The US Consumer Financial Protection Bureau collects data from the largest card issuers. It put the average swipe fee on general purpose credit cards at 1.8 percent of the purchase in 2022. In the bureau's words, issuers typically fund rewards through interchange revenue, and rewards took almost nine-tenths of it. People with rewards cards earned 1.6 cents in points, miles or cash for every dollar they spent on those cards in 2021 and 2022.
So, roughly, for each dollar spent on credit cards the store pays the bank about 1.8 cents, and on rewards cards about 1.6 cents comes back as rewards. The two figures are averages over different groups of cards, so this is a picture of the whole market, not the accounting of your own purchase. What it shows is that rewards are not paid out of the bank's generosity ; most of the money is a fee the store paid.
The same report found that issuers earn more in swipe fees than they spend on rewards. That gap is not simply profit, though. A Federal Reserve analysis found that rewards and other transaction costs together slightly exceeded banks' swipe fee income, and that lending supplied most of what banks earn from cards.
Why do people paying cash help fund card rewards?
Stores do not always absorb the fee. Many US stores charge one price however you pay, so the cost of accepting cards is spread across all their prices. Where they do, the shopper paying cash or debit pays the same shelf price as the shopper collecting points. Where a store adds a surcharge for credit cards or offers a discount for cash, that link is broken for that store.
In 2010, three economists at the Federal Reserve Bank of Boston, Scott Schuh, Oz Shy and Joanna Stavins, estimated what this adds up to. On average, they found, each household paying cash transfers $149 a year to households paying by card, and each card-using household receives $1,133. Card spending and rewards rise with income, so the transfer also runs upward. By their estimate, the lowest-income households, earning $20,000 a year or less, pay $21 a year, and the highest-income households, earning $150,000 or more, receive $750.
These figures are averages from an economic model that assumes stores charge a single price, not a bill any one household pays, and they depend on assumptions about how much of the fee stores pass into prices. Later work by Marie-Hélène Felt, Fumiko Hayashi, Joanna Stavins and Angelika Welte, published by the Boston and Kansas City Federal Reserve Banks, points the same way for the US and Canada. Once fees, rewards and the merchant costs built into prices are all counted, the lowest-income group pays the highest net cost as a share of what it spends, and the highest-income group pays the lowest.
A 2026 paper by Egan and coauthors, published by the National Bureau of Economic Research, uses data on individual merchants and still finds that cash and debit users help fund credit card rewards. It also finds the transfer smaller than a simple model in which everyone shops at the same stores would suggest. Cash and card users tend to shop at different merchants, and where they overlap, fees tend to be lower. Together these cut the transfer by about 25 percent from that paper's own simple benchmark. The two studies are not measured on the same basis, so the newer one does not shrink the Boston Fed figures by that amount ; what it shows is that the real transfer is uneven from one store to the next.
Do people who carry a balance pay for rewards too?
Swipe fees are not the whole story. The CFPB reports that interest, not swipe fees, is the main source of revenue for the card businesses of major banks. Most of that interest comes from people who carry a balance from month to month.
A Federal Reserve working paper by Sumit Agarwal, Andrea Presbitero, André Silva and Carlo Wix looked at about 238 million US credit card accounts. The authors found that people who pay in full profit from rewards cards at the expense of those they call naive consumers. Rewards cards lead everyone to spend more, but only some people end up with larger unpaid balances and the interest that comes with them. In the January 2023 version of the paper, the authors estimated an annual redistribution of $15 billion, from poorer to richer and from less to more educated areas.
That does not mean each person who carries a balance pays a fixed, knowable share of someone else's cash back. Nor can the $15 billion be added to the Boston Fed household figures, because the two studies measure different things.
So a reward has more than one paymaster. The store's fee, which shoppers often cover through prices, pays for most of it, and the interest paid by cardholders who carry debt supplies most of what card businesses earn. How any single reward splits between them, the evidence cannot say.
What happened when the US capped debit card swipe fees?
If rewards really come out of swipe fees, cutting the fee should cut the rewards. The US ran that test on debit cards. A provision of the 2010 Dodd-Frank Act, known as the Durbin amendment, led the Federal Reserve to cap debit swipe fees from October 1, 2011, for banks with more than $10 billion in assets. The cap is 21 cents plus 0.05 percent of the sale, with an extra cent for fraud prevention. A Richmond Fed analysis found that for a typical purchase this came to about half the fee charged before.
Rewards went quickly. A 2012 industry survey of debit issuers, commissioned by the Pulse network and cited by the Richmond Fed, looked at issuers covered by the cap that had a debit rewards program. Of those, 50 percent ended it in 2011, and another 18 percent planned to end theirs in 2012. The same analysis cites a Bankrate survey finding that the average monthly fee on noninterest checking accounts rose by 25 percent, though that rise cannot be put down to the cap alone.
Banks under the $10 billion line were exempt from the cap, so smaller banks and credit unions could keep earning the higher fee.
Did Europe's fee caps end card rewards there?
Europe gives a less tidy answer. In 2015 the EU capped swipe fees on consumer cards at 0.2 percent of the sale for debit and 0.3 percent for credit, with some exceptions set out in the regulation.
When the European Commission reviewed the caps in 2020, it reported that it could not link them to a systematic rise in cardholder fees, and found no clear change in loyalty programs or in how many cards banks issued. Almost three-fourths of card issuers told the Commission that their card benefits were unchanged or better. Critics of the caps read the same years differently.
Part of the Commission's finding rests on what issuers reported about themselves. Europe is better held as an open question than as proof either way, while the US debit case remains the clearest test.
Where do US credit card swipe fees stand now?
As of October 3, 2026, two efforts to lower US credit card swipe fees are moving, and neither is final.
On June 9, 2026, Judge Brian Cogan of the federal court in Brooklyn gave preliminary approval to a revised settlement between Visa, Mastercard and merchants, in a case that began in 2005. The settlement would cut average swipe fees by 0.1 percentage point for five years and cap fees on standard consumer credit cards at 1.25 percent for eight years. It would also let stores decline premium cards and add surcharges more freely. Preliminary approval is not final approval. According to trade press reports, hundreds of merchants and trade groups have filed objections, the hearing on final approval is set for November 16, 2026, and a convenience store trade group has said it would appeal if the settlement is approved.
In Congress, the Credit Card Competition Act of 2026 (S.3623) was introduced in the Senate on January 13, 2026, and sent to the Banking Committee. It has gained cosponsors since, but has had no committee vote or further step. The bill would require large card issuers to let stores route credit card payments over more than one network.
Whichever way these go, the arithmetic above stays the same. Rewards are paid largely out of the swipe fee, which is why both sides of this fight talk about rewards, and why the one time the US cut a swipe fee hard, rewards were among the first things banks dropped. Europe is a reminder that a cut does not have to end them.
- Payments Dive, Court approves Visa, Mastercard settlement
- American Banker, Judge approves card network fee settlement with merchants
- Visa statement on the MDL settlement
- Payments Industry Intelligence, US merchants mount fresh challenge to swipe fee settlement
- S.3623, introduced text (GovInfo)
- S.3623, actions (Congress.gov)
