Who Actually Pays for Your Credit Card Rewards

Cashback has to come from somewhere. It is not a discount the bank negotiated on your behalf and it is not a loss leader in any straightforward sense. It is mostly a share of a fee called interchange, paid on every card transaction, and the level of that fee is set by law in some markets and by the card schemes in others. Once you know which market you are in, most of what looks arbitrary about card rewards stops being arbitrary.

The four-party model, in one paragraph

When you pay by card, four parties are involved: you, your issuer (the bank whose name is on the card), the merchant, and the merchant's acquirer (the bank that settles their card takings). The merchant does not receive the full ticket price. Their acquirer deducts a merchant service charge, and the largest component of that charge is the interchange fee, which the acquirer pays across to your issuer.

So the money that funds your rewards is collected from the merchant and routed to your bank. Every cardholder benefit — the cashback, the points, the free travel insurance, the lounge visits — is paid out of a pool that begins its life as a deduction from a retailer's takings.

The caps, and their exact scope

In the UK and across the EU, that pool is capped by law. Under Regulation (EU) 2015/751, Article 3 sets interchange at "0,2 % of the value of the transaction" for debit card transactions, and Article 4 sets "0.3% of the value of the transaction" for credit card transactions.

The scope is where the interesting part lives. Both articles are titled by reference to consumer card transactions — Article 3 is "Interchange fees for consumer debit card transactions", Article 4 is "Interchange fees for consumer credit card transactions". Commercial cards are not covered by those two caps.

Article 5 is the anti-avoidance provision, prohibiting circumvention, which exists because the obvious way around a cap on one fee is to invent a different fee. Article 10 addresses the "Honour All Cards" rule and Article 11 addresses steering — both of which shape what a merchant is allowed to do about the cards that cost them most.

Why the US market looks different

The United States capped debit interchange for larger issuers through the Durbin Amendment. It did not impose an equivalent statutory cap on credit card interchange.

That one asymmetry explains most of the difference between the two markets. A US issuer earning several times the European interchange on the same transaction can fund several times the rebate and still make the economics work. When a US card advertises an earn rate that no UK card matches, the explanation is usually not that the UK issuer is meaner. It is that the UK issuer is capped at 0.3% on the fee that funds the rebate.

What this means when you are choosing a card

Treat an unusually high European consumer rate as a question, not a find. If the interchange pool is capped at 0.3% and a card advertises materially more than that as a rebate, the difference is being funded by something else — an annual fee, an interest margin on people who revolve, a foreign exchange spread, or an introductory period that ends. None of those is disqualifying. All of them are worth locating before you apply. Our guide to whether an annual fee is worth it works through that arithmetic.

Expect business cards to pay better than consumer cards in Europe, and know why. It is not a reward for being a business. It is that the consumer caps do not apply, so there is more fee income to share. That is genuine value, and it comes with genuinely different terms — see corporate card versus business card.

Do not compare a US headline rate with a European one. They are drawn from differently sized pools. The comparison is not close to like-for-like, and a European card cannot simply choose to match it.

The pending change nobody should overstate

The UK version of the regulation carries a note that it is revoked by the Financial Services and Markets Act 2023, Schedule 1, Part 1 — listed on legislation.gov.uk among changes not yet applied when this article was written on 19 August 2026.

That is worth watching and worth not exaggerating. A revocation that has not been commenced changes nothing today, and the substantive question is what replaces it: repealing a cap is not the same as deregulating a market, and the payments regulator retains its own powers over card fees. Anyone telling you UK card rewards are about to look American is describing a possibility, not a schedule.

The reward on your card is a share of a fee your bank collects from a shop. Cap the fee and you cap the reward. That is the whole mechanism, and almost every cross-market comparison that confuses people ignores it.

For how the rebate reaches you once the pool is set, see how credit card rewards work, and for the cards that convert it most efficiently, the current cashback shortlist.

Rates and rules change. The regulation linked above is the authority for the caps; check its current status before relying on a figure quoted anywhere, including here.