Competition for high-spending business travelers led banks to offer airline loyalty points as rewards. This cross-subsidization, funded by interchange fees, became so profitable that the loyalty programs are now worth more than the airline carriers they partner with.

Interchange is not just a transaction processing cost. It's pitched to merchants as a fee for bringing them desirable, high-spending customers who use a particular card brand, analogous to paying for an advertisement that drives business. The card issuer receives the largest share for taking on the risk and acquiring the customer.

Counterintuitively, Visa grows by introducing premium cards with higher merchant fees. These higher fees fund larger rewards, making the cards more attractive for issuing banks to promote and for affluent consumers to use. This strategy allows Visa to effectively capture market share through higher prices.

The media narrative that credit cards subsidize unprofitable flights is wrong. The two are linked businesses. The massive income from card programs would not exist without the core airline product and route network that gives the points value.

The fight for desirable credit users is so fierce that for customers in the middle-to-upper range of credit scores, the cost of rewards and cash back exceeds the revenue generated. Profitability only returns for the highest-spending users whose interchange fees outrun the reward expenses.

Cross-border transactions are a critical, high-margin driver for Visa. Due to increased complexity and currency exchange, these international payments carry fees roughly three times higher than domestic ones. Consequently, they contribute over a third of Visa's revenue despite representing only a tenth of its total payment volume.

High interchange fees on premium credit cards fund rewards for affluent users. Merchants bake these fees into universal pricing, meaning customers paying with cash or debit cards—who receive no rewards—effectively subsidize the perks of wealthier individuals. This creates a wealth transfer from the poor to the rich.

The 3% cash back on the Robinhood Card is viable because it's a customer acquisition flywheel. To receive the cash back, users must deposit it into a Robinhood brokerage account. This deepens their relationship with the ecosystem, increases assets on the platform, and makes them more profitable overall.

The system of charging retailers an interchange fee (around 1.8%) that is then passed to consumers as rewards (around 1.57%) creates a strong network effect. Consumers are incentivized to use rewards cards, and retailers cannot easily offer discounts for other payment methods, locking both parties into the ecosystem.