A Cashback reward program is an incentive program operated by credit card companies where a percentage of the amount spent is paid back to the card holder. Many credit card issuers, particularly those in the United Kingdom and United States, run programs to encourage use of the card where the card holder is given points, air miles or a monetary amount. This last benefit, a monetary amount, is usually known as cashback or cash back reward.
Where a card issuer operates such a scheme, card holders typically receive between 0.5% and 2% of their net expenditure (purchases minus refunds) as an annual rebate, which is either credited to the credit card account or paid to the card holder separately.
When accepting payment by credit card, merchants typically pay a percentage of the transaction amount in commission to their bank or merchant services provider. Merchants are not allowed to charge a higher price when a credit card is used as opposed to other methods of payment, so there is no penalty for a card holder to use their credit card. The credit card issuer is sharing some of this commission with the card holder to incentivise them to use the credit card when making a payment.
Rewards based credit card products like cash back are more beneficial to consumers who pay their credit card statement off every month. Rewards based products generally have higher Annual percentage rate. If the balance were not paid in full every month the extra interest would eclipse any rewards earned. Most consumers do not know that their rewards-based credit cards charge higher fees to the vendors who accept them without vendors having any notification.
What is the benefit for Card issuer?
When merchants accept payment via credit card, they are required to pay a percentage of the transaction amount as a fee to the credit card company. If the card holder has a participating cash back rewards program, the credit card issuer is simply sharing some of the merchant fees with the consumer. The goal is to incentivize people to use their credit cards when making payments rather than cash, which earns them no rewards. The more that a consumer uses a credit card, the more merchant fees the credit card company can earn