How to Understand Cashback Rewards Program Quickly

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 cardholder. Here you can read Card present vs Card not present transactions.

6-Cashback Reward-program: How Card Issuers Operate

What is Cashback Reward Program?

Many credit card issuers, particularly those in the United Kingdom and the United States, run programs to encourage the use of the card where the cardholder is given points, air miles, or a monetary amount. This last benefit, a monetary amount, is usually known as cashback or cashback reward.

Where a card issuer operates such a scheme, cardholders 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 cardholder 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 cardholder to use their credit card. The credit card issuer is sharing some of this commission with the cardholder to incentivize them to use the credit card when making a payment.

Real benefits to Cardholders

Rewards-based credit card products like cashback are more beneficial to consumers who pay their credit card statements off every month. Rewards-based products generally have a 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.

How this Program works?

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 cardholder 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.