Waait.... the merchants pay for the rewards?
Even loyalty programs like the card with stamps you might get at your local coffee shop got priced in somewhere along the way.
No, I don't pay for the rewards on my premium rewards credit card.
For the most part, my rewards are paid for by everyone else who doesn't have a premium rewards credit card.
Premium rewards cards cost merchants a lot more to accept than regular credit cards and debit cards.
Rewards cards: 5% to 10% of total volume with swipe fees of 2.5% to 4.0%
Regular credit cards: 30% to 40% of total volume with swipe fees of 1.5% to 2.5%
Debit cards: 50% to 60% of total volume with swipe fees of 0.5%
Yes, merchants build their payment costs into the prices of their products, but they generally don't charge different prices depending on what card the customer uses.
So the majority of the population that doesn't qualify for a premium rewards card is effectively paying more for everything to subsidize the more wealthy people at the top.
In the end, all costs are borne by the customer because there's really no other source of revenue.
Now since the costs are already in the price, you "give up" something by paying cash, but that's getting less and less common because more and more places are offering cash discounts (now that the feds sat on the processors).
This would be considerably more relevant if the price paid was related to the costs in any meaningful way. 50+ years of economic study demonstrates rather conclusively that it is not.
The best example of this is (was?) gas stations, where the ones taking cash or debit only would be cheaper, because the credit card processing is a significant cost in a low-margin product-interchangeable market.
The bigger companies try to make you THINK that there's a difference between their gallon of gas and that other gallon over there that came from the same depot, but there really isn't.
Merchant negotiates with their payment processor (NOT Visa/MC usually, but a middleman like Stripe or their bank or whatever). Depending on this negotiation, it may be a flat percentage, a per charge fee + a smaller percentage, or even a dynamic percentage depending on card type or transaction type, or other variations - rumor has it that Costco gets 0% fees from their processing deal with the bank for their card.
Payment processor negotiates with the network, and this is much more likely to be where "you pay for the rewards" happens - Visa/MC is the other party and they pass costs along, but usually the payment processor "bundles" everything to simplify it for the merchants.
Then Visa/MC (and somewhat Amex/Discover but those are kind of special cases) negotiate with the issuing bank about what they will get (basically, the payment amount - the Visa/MC "cut").
The bank then negotiates with YOU about what rewards and other features you get with your card.
Each layer can have a negotiator decide to absorb some of the costs for certain reasons. But looking at the above, you realize why stores push their store card so hard. They can be all four of the above if they want to. And 3% is worth it.
Basically racketeering.
e.g. As Visa/MC, I market a product that literally discounts everything you buy, and make my business partners (the merchants) pay for it. That keeps my margins the same, limits my downside risk, and raises the upside ceiling...all on someone else's dime.