The card rewards cross-subsidy is the transfer of money from customers who pay with cash, a debit card or a basic card to customers who use rewards credit cards. It arises because merchants pay higher fees on rewards cards and, when they cannot charge card users more, spread those costs across the prices that every customer pays. Part of the cashback, points and airline miles that rewards cardholders receive is therefore funded by people who earn none.
The idea is a central argument in debates over interchange regulation, merchant pricing rules and card competition laws. It is related to, but separate from, a second transfer inside the credit card market, in which interest and fees paid by cardholders who carry a balance help fund rewards for those who pay in full each month. How large either transfer is remains disputed.
Card rewards cross-subsidy in plain terms
Imagine a group dinner where the bill is split evenly, but a few diners order expensive extras that the restaurant gives them a free dessert for. Everyone pays the same share, so the people who ordered simply have part of their treat paid for by the rest of the table. Nobody chose this deliberately; it happens because the bill is shared.
Shop prices work in a similar way. A store pays more to accept a premium rewards card than to accept cash, but it usually puts one price on the shelf for everyone. The extra cost gets folded into that price. The rewards cardholder gets points back from the bank, while the person paying cash pays the same slightly higher price and gets nothing back.
How the transfer works
The chain starts with the merchant discount rate. Rewards and premium cards usually carry higher interchange, which the card issuer uses to fund the rewards. If network rules or law stop the merchant adding a charge for those cards, and the merchant does not offer a cash discount, the cost is recovered through higher prices for all buyers. A rough measure of the effect on prices is:
- is the rise in average prices needed to cover card fees, as a decimal.
- is the share of the merchant's sales paid by card, as a decimal.
- is the average fee rate on those card sales, as a decimal.
If 80% of a shop's sales are by card at an average fee of 2%, then , so prices are about 1.6% higher than they would be with no card costs. A cash buyer spending $1,000 a year there pays about $16 of that cost and receives no rewards, while a rewards cardholder pays the same $16 but may earn back 1% to 2% in points. The example assumes full pass-through, which real shops may not achieve.
Research on who pays
The best-known estimate comes from a 2010 Federal Reserve Bank of Boston paper by Scott Schuh, Oz Shy and Joanna Stavins, "Who Gains and Who Loses from Credit Card Payments?". Using US data and assuming merchants pass card costs into uniform prices, the authors calculated that each cash-paying household transfers about $149 a year to card users, while each card-using household receives about $1,133. After counting rewards, the lowest-income households paid about $21 a year and the highest-income households received about $750.
A later study by Sumit Agarwal, Andrea Presbitero, André Silva and Carlo Wix, "Who Pays for Your Rewards?", published as a Federal Reserve working paper in 2023, used account-level data from large US banks. It estimated an annual redistribution of about $15 billion through rewards cards, flowing from less-educated, poorer and higher-minority areas toward richer and more-educated ones. That study focuses on the transfer inside the credit card market, where interest and fees from those who carry a balance at a high annual percentage rate help fund rewards for those who do not.
Policy responses
Regulators have tried several levers. Interchange caps, such as the EU's 0.3% cap on consumer credit cards and Australia's caps, reduce the fee that funds rewards; after Australia's first card reforms in 2003, issuers reduced the generosity of many rewards programmes. Allowing card surcharging lets merchants charge rewards card users directly.
In the United States, the Durbin Amendment capped debit interchange for large issuers and required debit routing choice, but did not touch credit cards. The Credit Card Competition Act, first introduced in 2022 by Senators Dick Durbin and Roger Marshall and reintroduced in January 2026, would require the largest issuers to enable a second, unaffiliated network on their credit cards. Supporters say network competition would lower fees and the cross-subsidy; banks and networks argue it would shrink rewards and weaken fraud protection.
Counterarguments and limits
The card industry disputes how much of the cost is passed through to prices. It argues that merchants gain from card acceptance through higher sales, guaranteed payment and lower cash-handling costs, and that rewards are part of a fair bargain with cardholders who spend more. Economists also note that cash users are not a single group: some choose cash while holding cards, and others lack the credit score needed to get a rewards card. Estimates depend on assumptions about pass-through and spending patterns, so the size of the cross-subsidy remains debated even where its direction is widely accepted.