Who Pays for your credit card reward points?

Decoding the world of Reward credit cards and its rewarding system

Let’s size the market: To begin with:

The total value of credit card transactions is expected to reach INR 51.72 Trn by FY 2027, expanding at a CAGR of 39.22% during the FY 2022 — FY 2027 period The volume of credit card transactions is projected to expand at a CAGR of ~26.43% during the forecast period. In FY 2021, a significant increase in the value of credit card transactions was witnessed. This rise was the result of a surge in the number of transactions per credit card and cardholders. The banking system reported over 1.2 million new credit card additions in November 2021.

Purchases on rewards cards reached a whopping almost 90% of spending on general-purpose credit cards in 2016, according to the Consumer Financial Protection Bureau.

Have you ever wondered about the rewards you earn against these trillions of credit card transactions happening every year

  • Where does it come from?
  • Who pays for it?

This is what we will decode today in this piece of the Financial knowledge series!

What Are Reward Credit Cards?

These cards in exchange for your spending shower rewards in the form of

  • Cashbacks
  • Reward Points
  • Travel miles

Etc, which largely varies and depends upon the credit card category and card providers. The idea here is to encourage more spending and increase engagement for the merchants who have agreed to accept the card payments you make for an exchange of goods & services.

How Do Rewards Credit Cards Work?

Do you know the reward credit card type has the largest share of the credit card market and almost every card ends up rewarding its customer one or the other ways?

These rewards can be collected when you swap your credit card at any merchant outlet or make a digital payment against them. Credit card providers put a clause like for spending 50k or 30k or XYZ amount in a month, you get certain reward points.

You can know how many reward points have been accumulated from the credit card statements which banks issue every month or from the bank's credit card app.

Let’s take an example of HDFC millennia credit card-

They have listed the following reward(cashback/Cashpoints) benefits:

CashBack will be given in the form of CashPoints, which can be redeemed by you against the statement balance (on request only).

  • The redemption against the statement balance will be at the rate of 1 CashPoint = ₹1
  • The minimum CashPoint balance required for redemption against the statement balance is 500 CashPoints.
  • CashPoints can also be used for redemption against travel benefits like Flight & Hotel bookings and Rewards Catalogue at the SmartBuy Rewards Portal, at a value of 1 CashPoint = ₹0.30.
  • Unredeemed CashPoints will expire/lapse after 2 years of accumulation
  • Flights and Hotels redemption, Credit Card members can redeem up to a maximum of 50% of the booking value through Reward Points. The Rest of the transaction amount will have to be paid via the Credit Card limit
  • Redeem CashPoints at the conversion rate of 1 CashPoint = ₹0.30

Redemption Of Reward points:

You can redeem the accrued reward points for purchasing any merchandising, gift cards, or against travel perks, etc. Some banks also allow you to get cashback against the same. To redeem generally you get the app or web interface listing down all the items/gift coupons etc, in the form e-Commerce store.

Now that you have got the fundamentals of reward credit cards, its time to debunk

Who pays for the reward points that you get?

Before decoding this we need to understand from where the revenue comes to pay you back these rewards.

“Paisa kaha see aata hai bhai? ”

  • You(Consumers) are one of their primary source of revenue
  • Second, are the Merchants who accept the credit card also adds up to the revenue for credit card service providers

How do they earn revenue from consumers(you)?

Your contributions come when you pay the interest for any outstanding balance and you are charged a late fee for not paying the payment on time. You also pay a fee for withdrawing any cash in advance.

There is also a facility in which payment wallets like Mobikwik, Freecharge, etc provide for withdrawing the credit limit available into your personal bank account, you are charged heavily somewhere around2–2.5 % on the given amount which is equivalent to 20–25 % over the entire year.


Spend your credit card wisely and avoid leveraging it for getting extra cash in your bank, you get charged upfront, and also if you fail to pay the balance amount you attract a penalty for the same. It’s not a good idea.

Here is the Catch, which you are not aware of!

Do you know that retailers/merchants to whom you pay via credit card also pay a fee to the credit card providers? The fee that they pay to them is called “interchange fees/rates

  • Interchange rates are a per-swipe fee charged by banks to merchants using credit or debit cards.
  • Fees are charged by payment processing companies like Visa, Mastercard, Discover, and American Express.
  • The interchange rate is normally a small percentage of the transaction amount and is currently higher for credit card transactions compared to those made with debit cards.

Do you know!

Rewards credit cards have higher interchange rates than run-of-the-mill cards because the card issuers have to compensate the cost of paying the rewards.These Interchange fees generate billions of dollars in revenue, helping to cover the expense of credit card rewards.

Eventually, merchants try to recoup these charges by passing on the same to the consumers some or the other ways, let’s un-layer the same

How do these Interchange costs get passed to consumers?

Though It is not straightforward, merchants try to recoup the interchange by applying certain surcharges which are not legal in many states and have been banned, so the best way for them is to add the cost to the product which consumers purchases. Eventually, you end up paying for the leveraging credit card and its rewards.

Merchants don’t want to pay those fees out of their own pockets — so they pass some of them on at prices that everybody in the system pays, not just the credit cardholders.

It's people like us who engage in online transactions through wallet, cards end ups paying for the rewards that we often seem to consider as a free gift.


To sum up, often Rewards are funded by interest and fees paid by customers and from merchant fees that are baked into the prices of the product. So nothing is a free lunch here, you are the reason this system exists and is flourishing with every day, weeks, months passing by.



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Passionate Blogger & Tech Entrepreneur | Founder of FinTech Startup | Write about AIML, DevOps, Product Mgmt & Crypto