Agreed. And the rewards aren't paid for with the fees charged to the customer; they're paid for with sweetheart deals between the payment processor and reward provider. There's nothing wrong with this even - it's biz dev 101.

As an example: Mastercard (let's say) offers American Airlines cobranding, marketing (in the form of newsletters and emails pushing me to use miles whenever i pay my bill) and service perks (read: lower transaction processing fees) in exchange for frequent flyer points (note - not even dollars, a point is some fraction of a dollar in terms of flight purchasing power) for tickets on flights that would otherwise probably have a seat empty. Nice seats on full flights cost more points, of course. I get these points if I use my card often enough.

I'm fine with this arrangement - both parties are gaining here, and maybe I as a customer get a nice perk occasionally when I finally have enough incidental points saved up to go on a flight - but none of us is under the impression that there's some one to one relationship between fees charged and amount of money paid for redeemable rewards, and I expect that in volume both parties are actually making money off of this arrangement, not sacrificing revenues.

There's also a feedback loop at work here - Mastercard pushes points for American Airlines, more people use American Airlines, more of them end up using the same airline regardless of points due to familiarity and customer stickiness, so Mastercard gets more AA transactions and more fees overall - even though they've dropped the per-transaction fee rate, the increased volume makes up for it...