The Hidden Split
The short answer
Credit card rewards are funded by a system, not a single payer.
Interchange revenue from card purchases is the most direct funding source. The merchant bears the immediate cost of accepting the card, while an issuer may return part of its interchange revenue to the cardholder as cash back, points or miles. But that is only the payment side of the business. Annual fees contribute to the economics of some premium cards, and borrowers who carry balances generate interest—historically the much larger profit engine for major issuers.
That distinction matters. The fee a merchant pays is not simply collected in full by Visa or Mastercard, and the profit on a credit card is not the same thing as the money used to issue a reward. Follow the participants and the apparently free perk becomes a set of separate transfers.
Start at the register
What happens to a $100 purchase?
Consider the simplified example used by Federal Reserve researchers. You spend $100. The bank that issued your card retains $2 as interchange and sends $98 toward the merchant side. The merchant’s acquirer—the institution handling card payments for the store—pays a 15-cent network fee and keeps a 15-cent merchant service charge. The merchant receives $97.70. If the issuer then gives the cardholder $1 in rewards, the purchase has already become several streams of money.
Those figures are illustrative, not a universal rate card. Actual fees depend on the card, merchant and way a transaction is made. The useful part is the structure: the amount charged to the customer and the amount ultimately received by the merchant are not identical.
The issuer might return $1 to the cardholder as a reward in this example. Exact fees vary; the diagram explains the flow, not a standard price.
The payment chain
Who gets paid when the card is tapped?
A typical Visa or Mastercard purchase involves several businesses. The issuer provides the card, owns the customer relationship and takes the credit exposure. The card network runs the rails that carry transaction information. The acquirer and processor handle the merchant side. Each role has its own economics.
The merchant discount—the total amount the merchant pays to accept the transaction—can contain multiple components. Interchange goes to the issuer. A separate network fee goes to the network. The acquirer or processor keeps its own charge. Treating that entire merchant cost as “the Visa fee” or “the Mastercard fee” erases the most important split.
Visa says interchange reimbursement fees are generally paid by acquirers to issuers and that Visa generally does not receive revenue from them. Mastercard likewise says it does not earn revenue from interchange. The networks matter, but they are not the banks lending the cardholder money or receiving the interchange revenue in this four-party model.
The reward pool
How interchange helps fund rewards.
The Consumer Financial Protection Bureau says issuers typically fund rewards through interchange revenue. In 2022 data for large issuers, rewards-card customers earned about 1.6 cents for each dollar spent, while average interchange on general-purpose cards was about 1.8% of purchase volume. Rewards therefore represented almost nine-tenths of interchange revenue in that dataset.
The scale is no longer marginal. Rewards cards accounted for 92% of U.S. general-purpose credit card spending in 2023 and 2024, according to the CFPB, and consumers earned about $47.5 billion in credit card rewards during 2024. Merchant-side transaction revenue is a major source of those benefits.
Yet “the merchant pays” is still incomplete. A merchant bears the immediate acceptance cost and may sometimes add an explicit card surcharge. More broadly, businesses can respond to payment costs through pricing, though the degree of pass-through varies. The incidence can spread beyond the receipt from one transaction.
Two layers
A credit card is both a payment product and a lending product.
On the payment layer, the cardholder buys, the merchant pays to accept the card, the issuer receives interchange and the cardholder may earn a reward. On the lending layer, a cardholder leaves part of the statement unpaid, carries the balance into another billing cycle and pays interest.
Federal Reserve researchers studied card portfolios at 13 large banks from 2014 through 2021, covering about 80% of credit card balances in the relevant regulatory data. They estimated that the credit function accounted for about 80% of aggregate credit card profitability on average. After rewards and other transaction-related costs, the transaction function was slightly negative.
This does not mean one borrower’s interest payment can be traced directly into someone else’s airline miles. Interest income must also cover funding costs, credit losses, collections, operations and capital. Nor does one sample describe every issuer and every year. It does show why funding a reward and earning a profit are different questions: the swipe supports the perk, while lending historically produced most of the profit in this large-bank sample.
Key takeaways
Where the reward—and the profit—come from.
- Interchange is the direct answer. Issuers typically use revenue from merchant-side card transactions to fund rewards.
- The merchant fee is divided. Interchange, network fees and acquirer or processor charges pay different participants.
- Networks do not simply keep the whole fee. In the common four-party model, interchange passes from the acquiring side to the issuing bank.
- Payments and lending have different economics. Large-bank research found that lending historically generated most aggregate credit card profit.
- Usage determines outcomes. A cardholder who pays in full can experience the system very differently from one who carries a balance.
Evidence on file
Primary and official sources.
- The Consumer Credit Card Market (2025) ↗Consumer Financial Protection Bureau
- Credit Card Profitability ↗Federal Reserve Board
- Who Pays for Your Rewards? Redistribution in the Credit Card Market ↗Federal Reserve Board, FEDS 2023-007
- Payment Cards: Costs and Benefits for Federal Entities ↗U.S. Government Accountability Office, GAO-25-107298
- Credit Card Processing Fees & Interchange Rates ↗Visa
- Mastercard Interchange Fees and Rates Explained ↗Mastercard
Figures and conclusions above retain the scope and qualifications used in the underlying research. This article explains a business system; it is not personalized financial advice.