Who actually pays for your credit card rewards in Canada?

The short answer is that your rewards are paid for out of the fees merchants are charged to accept credit cards, and merchants recover much of that cost through their prices. Every time you tap a rewards card, a small slice of the sale, called interchange, flows from the store's bank to the bank that issued your card, and your issuer uses part of it to fund points and cash back. So the money does not come from thin air, and it does not come purely from the bank: it starts with the merchant and, through pricing, is shared across everyone who shops there.

This guide explains how that loop works, who sets the fees, and what Canada's recent interchange reductions actually changed. Nothing here is financial advice; confirm current rates on the official pages linked below before acting.

What an interchange fee is

When you pay with a credit card, the store does not keep the full purchase price. It pays a bundled cost called the merchant discount rate (MDR) to its payment processor. The largest component of that rate is the interchange fee, the amount the merchant's bank (the acquirer) pays to the bank that issued your card. The rest covers network assessments charged by Visa or Mastercard and the processor's own margin.

Crucially, the card networks set interchange rates, and they publish them. Individual banks do not haggle over them transaction by transaction. Rates vary by card type: a no-frills card carries lower interchange, while a premium rewards or business card carries higher interchange, because part of that fee is what funds the richer rewards.

Who gets what in the fee flow

Here is roughly where the money goes on a typical Canadian credit card purchase.

Party	Role	Gets paid via
You (cardholder)	Make the purchase, earn rewards	Points and cash back funded from interchange
Merchant	Sells the goods, accepts the card	Pays the merchant discount rate (loses a slice of the sale)
Acquirer (merchant's bank/processor)	Routes the transaction, settles funds	Keeps a processing margin
Card network (Visa, Mastercard)	Sets interchange, runs the rails	Network assessment fees
Issuer (your bank)	Issues the card, funds rewards	Interchange (the largest piece), plus interest and annual fees

The single biggest piece is interchange, and it lands with your issuer. That is the core of the rewards loop: higher interchange on premium cards gives issuers a budget to offer more generous points and cash back, which attracts high spenders, which generates more interchange.

The merchant-cost-to-rewards loop

So who ultimately pays? Mostly the merchant, at first contact. But merchants rarely absorb the cost quietly. Research from the Bank of Canada on the cost of accepting payments at the point of sale shows card acceptance is a real and uneven business expense, and businesses generally recover it the way they recover any cost of doing business: through their prices.

That has an important side effect. Because a store usually charges one price regardless of how you pay, the cost of card acceptance is spread across all customers, including those paying with cash, debit, or a no-rewards card. People who pay by cash or basic debit do not earn rewards but still help cover the price that bakes in card costs, while heavy users of premium rewards cards earn the richest points. Economists describe this as a transfer from lower-spending, lower-reward payers toward higher-spending, higher-reward cardholders, which tends to flow up the income scale on average.

Since October 2022, merchants outside Quebec have also been allowed to surcharge credit card purchases directly, capped at 2.4 percent and subject to clear disclosure rules. Quebec's Consumer Protection Act effectively prohibits the practice. Where surcharges apply, the cost becomes visible at checkout rather than hidden in the shelf price, and you can usually avoid it by paying with debit or cash.

What Canada's 2024 interchange cuts changed

For years, Canadian small businesses argued that interchange here was high by international standards. In response, the federal government negotiated agreements with Visa and Mastercard, finalized in December 2023 and effective in the fall of 2024, to lower fees for qualifying small businesses.

The headline terms:

• The annual weighted average interchange rate on in-store consumer credit transactions was cut to 0.95 percent for eligible small businesses.
• Online (card-not-present) interchange was reduced by 10 basis points.
• Eligibility was tied to volume: businesses with annual Visa sales below $300,000 and annual Mastercard sales below $175,000 qualify.
• The government said more than 90 percent of credit-card-accepting businesses would be eligible, with cuts of up to 27 percent off their existing average rate.
• The estimated savings were about $1 billion over five years for eligible small businesses.

What this means in practice: the cuts target the merchant side of the loop, not your rewards directly. They reduce what qualifying small businesses pay to accept cards. They do not, on their own, change the points or cash back your issuer offers. The connection is indirect and longer-term: if interchange revenue falls broadly over time, issuers have a smaller budget for rich rewards, which is part of why premium card economics depend on those fees staying healthy.

The consumer takeaway

A few practical points fall out of all this:

• Your rewards are funded primarily by interchange, which originates as a merchant cost. They are not free money, and the cost is shared widely through pricing.
• Premium rewards cards carry higher interchange, which is why they can pay more. That is the same reason their value only works if you pay in full and avoid interest.
• If you carry a balance, interest will dwarf any rewards. See how that math works in our guide to how credit card interest works in Canada.
• To actually capture the value of the loop, match the card to your spending. Compare the two main reward styles in cash back vs points, and learn how we value points in our point values guide.

If you want to put a rewards card to work, browse our picks for best cash back cards and best rewards cards, or see every card we track in the full card list. The economics above are exactly why paying in full each month is the rule that makes rewards a net win rather than a net cost.