Reward points and cashback on a payment card are not a gift from the issuer. They are funded mainly by a fee that flows from the merchant back towards the bank.
What happens when a card is presented
The merchant's acquirer pays the issuing bank a fee on each transaction, known as interchange. The rate is set by the card scheme rather than negotiated individually.
The merchant sees this bundled into a broader service charge. Interchange is usually the largest component of it, with scheme fees and the acquirer's margin on top.
The issuing bank receives that interchange for every purchase. It is the main recurring revenue a card generates from a customer who never pays interest.
Why the reward rate follows the fee
An issuer can only give back a portion of what it receives. A card that earns high interchange can support a generous reward rate, and a card that earns little cannot.
Premium and business cards carry higher interchange than standard consumer cards, which is why their rewards are richer and their annual fees exist to cover the rest.
Regulatory caps on interchange in some regions reduce that revenue directly. Reward programmes in capped markets are noticeably thinner as a result.
Where the merchant recovers the cost
Acceptance costs are a cost of sale like any other. In most retail categories they are absorbed into shelf prices paid by every customer regardless of payment method.
That means cash and debit customers help fund credit card rewards, which is the central argument in long-running disputes over how interchange should be regulated.
Some merchants respond with surcharges, minimum spends or discounts for other payment methods, where local rules permit them to differentiate at the till.
Why certain purchases earn nothing
Transactions where the merchant has negotiated very low acceptance costs, or where interchange is capped by category, generate little for the issuer to share.
Utility bills, tax payments, government charges and some large-ticket categories fall into this group, which is why they are so often excluded from earning.
Cash-like transactions are excluded for a different reason. They carry fraud and credit risk without a genuine sale behind them, so no reward is offered at all.
What this implies about the offer
A reward rate is a share of a fee, so the ceiling is set by that fee rather than by the issuer's generosity. Rates far above it must be funded from somewhere else.
That somewhere else is usually interest, annual fees, foreign exchange margins or breakage on unredeemed points, all of which fall on a subset of cardholders.
The programme balances across the whole portfolio rather than for each customer, which is why a card can be profitable overall while paying out generously to some.