[rictic]

Aren't rewards also subsidized by interest rates charged on those cardholders who carry a balance at the end of the month? My understanding was that that's a very significant income stream, and that's missing from your comparison of ~1% rewards to the 1.5-1.65% interchange.

[abalone]

It's complicated. Rewards cards tend to be less competitive on APR, so they are less attractive to consumers who carry large balances. The wealthiest consumers who spend the most often have the best rewards programs and carry no balance. But you're right, that's a revenue stream that factors into it. There are other sources too, like penalty fees.

At the same time, some cards "magically" do more than 1%.. they do 2% or even 3% in some cases. You can guess where those funds come from.

But don't miss the bigger point here. The card issuer market is a competitive one. Regardless of where the revenue comes from, competition pressures issuers to hand more of that value to the consumer. It makes it a less lucrative business than the raw processing fee might suggest.