Why Premium Credit Card Rewards May Be Raising Prices for Cash and Debit Users

Consumers who carry today’s popular rewards credit cards are now accustomed to receiving 2% cash back on their everyday spending or being able to tap into 5% or more in categorical savings at places like grocery stores, gas stations, and restaurants. But who is actually paying for those rewards we’ve grown so fond of?

That was the central question at the heart of a working paper out of Harvard Business School, called “Who Pays for Payments?” which recently examined premium credit card rewards and who may ultimately help pay for them.

Merchants that accept credit card payments must pay fees to issuing banks, card networks and acquirers. And many merchants, who often operate on tight profit margins, then elect to raise their prices so that shoppers who pay with cash or debit card users can end up helping cover those costs through higher retail prices, according to the paper. 

The working paper’s researchers estimate that this under-the-radar subsidization leads to a wealth transfer of about $30 billion a year from cash and debit users to credit card users.

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We caught up with Mark Egan, Professor of Finance at Harvard Business School and co-author of the study, to learn more about his findings. Researchers from universities including Stanford, Northwestern, and Georgia State also contributed to the study.

Egan said the study estimates premium credit cards can cost merchants about 2.3% of a transaction to accept. But consumers who own them can get a portion of the higher prices they pay back in the form of their card’s rewards. 

Merchants, of course, have plenty of incentives to accept credit cards, though some cost more than others.

Businesses that take credit cards expand their customer base to people who prefer to use that payment method exclusively. And people who pay with credit cards can spend more than those who turn to cash or debit cards to complete transactions because credit card users can make purchases using borrowed funds.

“If you’re using a premium credit card, and I’m using cash, we actually don’t tend to shop at the same merchants. And if we shop at different places, then this subsidization actually doesn’t happen.” — Mark Egan, Professor of Finance at Harvard Business School

Merchants that accept card payments can also see less friction at the point-of-sale. A swipe or tap of a card can take much less time than waiting for a customer to count dollars and cents or fill out a check. And taking cash for payments comes with other issues and often unforeseen costs.

“Certainly there are costs associated with managing cash,” Egan told us. “You have to worry about things like employee theft that are going to impose some costs on the merchant as well.”

Credit card rewards continue to be popular with consumers. A 2025 survey from market research outfit Morning Consult and the American Bankers Association found that 82% of respondents own one or more credit cards that come with rewards. And 90% of those people report that they value their card’s rewards program.

The Harvard working paper reveals that the popularity of premium credit cards in the U.S. has exploded over the past 20 years. In 2006, premium credit cards represented just 15% of total credit card volume, according to the paper. That number grew to 60% by 2022.

But not everyone opts for a premium credit card, which can come with annual fees that may be too hefty for some consumers to absorb. 

“In general, those people who use these premium credit cards tend to be higher-income [consumers], whereas people who use cash and regulated debit cards tend to be lower-income consumers,” Egan told us.

And he also pointed out that people who transact with cash can have different habits when it comes to shopping than individuals who prefer to use premium credit cards.

“One interesting feature of the data is if you’re using a premium credit card, and I’m using cash, we actually don’t tend to shop at the same merchants,” Egan said. “And if we shop at different places, then this subsidization actually doesn’t happen. It only happens if you and I shop at the same stores.”